Assignment II - ECO 106 Fall 2009 HAND-IN ASSIGNMENT II due...

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ECO 106 – Fall 2009 HAND-IN ASSIGNMENT II – due 11/3: 1. An economy has the following aggregate consumption function: C = 10 + MPC * YD, where MPC = 0.8. Investment spending = 30. We assume for simplicity that there is no government spending, and that prices and interest rates stay constant as demand changes. Assume that YD = GDP. (i) Draw a graph for desired aggregate spending, and find equilibrium GDP in this economy. (Find the value of equilibrium GDP, and mark it in the graph.) (ii) If GDP = 150, is the economy in equilibrium or not? What is happening to inventories? Are producers happy with the situation, or what will tend to happen? (iii) If Investment spending increases from 30 to 50, what is the new equilibrium value of GDP? Show graphically and find a number for the new level of GDP. (iv) Why does GDP not increase by 20? Explain briefly. 2. A closed economy has a total production of $50 mill. Consumption is $35 mill., government spending is $6 mill.
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