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Solution to Problem Set 13 (ECO100)

# Solution to Problem Set 13 (ECO100) - Prof Gustavo Indart...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Solution to Problem Set 13 Problem 1 a) AE AE 380 A 200 b B 45 E 200 400 Y b) Consider the triangle A in the above diagram. The hight of this triangle is 380 – 200 = 180 and its base is 400 – 200 = 200. Therefore the slope of the hypothenus is 180/200 = 0.9. c) If equilibriuim GDP is 200 and the potential GDP is 400, we have a recessionary gap of 200. d) If the slope of the AE curve is 0.9, the simpleKeynesian) expenditure multiplier is β = 1 / (1 – 0.9) = 10. Therefore, Y = β∆ G or 200 = 10 G, and G = 20.

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2 Problem 2 a) The savings function is S = –10 + sYD, where s = 1 – c is unknown. But when YD = 400, S = 70. Therefore, 70 = –10 + s(400) or s = 80/400 = 0.2. Accordingly, c = 1 – 0.2 = 0.8. b) YD = Y – TA, and therefore YD Y – TA. If TA = –10, then YD = –(–10) = 10. Therefore, C = c YD = 0.8(10) = 8. c) If prices increase, real wealth will decrease. Since individuals accumulate wealth to be able to maintain a certain level of consumption after they retire, the
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Solution to Problem Set 13 (ECO100) - Prof Gustavo Indart...

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