A
NSWERS TO
A
SSIGNMENT
1
Section I: Multiple Choice Questions (Total Marks 50)
1.
A
2.
D
3.
A
4.
D
5.
B
6.
A
7.
B
8.
C
9.
B
10.
C
11.
B
12.
C
13.
B
14.
B
Section II: Long Question (Total Marks 50)
a. By definition, planned expenditure is:
E = C + I + G + GX – IM
Substitute in all the equations given in the question:
E =
C
0
+ C
y
(1t)Y +
I
0
– I
r
r + G
0
+ X
F
Y
F
+ X
ε
ε
0
– X
ε
ε
r
r + X
ε
ε
r
r
F
– IM
y
Y
Now separate each of the components above in those that directly depend on Y
and those that do not:
E = [
C
0
+
I
0
– I
r
r + G
0
+ X
F
Y
F
+ X
ε
ε
0
– X
ε
ε
r
r + X
ε
ε
r
r
F
] + [
C
y
(1t) – IM
y
]Y
The component that does not depend on national income (or real GDP) is
autonomous expenditure:
A =
C
0
+
I
0
– I
r
r + G
0
+ X
F
Y
F
+ X
ε
ε
0
– X
ε
ε
r
r + X
ε
ε
r
r
F
And the coefficient on income is the marginal propensity to expend, i.e., it tells
you how much planned expenditure will change if income rises by one dollar:
MPE =
C
y
(1t) – IM
y
Then we can rewrite the planned expenditure line as:
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E = A + MPE*Y
b. The goods market is in equilibrium when planned expenditure (or aggregate
demand) is equal to real GDP (or national income):
Y = E
Using this equilibrium condition and the behavioral relationship from part (a)
you can solve for equilibrium real GDP:
Y = A/(1MPE)
See Figure 1 for the income expenditure diagram. In Figure 1 I plot both the
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 Winter '09
 TASSO
 Macroeconomics, equilibrium real GDP

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