This preview shows pages 1–2. Sign up to view the full content.
ECON 162BA0, A1
Kenny Christianson
Fall 2010
due: November 24
PROBLEM SET NUMBER EIGHT
1.
In the classical model, what is the effect of an increase in government spending that is
not financed by an increase in taxes (an increase in the deficit)?
How do prices, real
GDP, consumption, saving, investment spending, and real interest rates change as a result
of the increase in government spending?
Explain and show graphically.
2.
Assume that the level of autonomous consumption in Mudville is $800.
If the
marginal propensity to consume is 0.75, what is the consumption function?
Saving
function?
Give an equation for each and show each graphically.
At what level of income
is saving = 0?
Show on your graphs.
3.
Assume a closed economy (no exports or imports) and that taxes = 0.
The
consumption function is given by
C = 200 + Y
If investment spending is $300 and government spending is $100, find the equilibrium
level of GDP.
Show graphically.
(HINT:
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '05
 Christianson
 Deficit

Click to edit the document details