Allchapter3problems

# Allchapter3problems - Answers to Problems in Textbook 1 a...

This preview shows pages 1–2. Sign up to view the full content.

Answers to Problems in Textbook 1. a. Consumption equals 1,400 + 0.6(10,000 - 1,750) = 1,400 + 4,950 = 6,350. b. Saving equals disposable income minus consumption, which equals 8,250 - 6,350 = 1,900. c. The level of planned investment equals 1,800. To compute the level of actual investment, I , remember that income and expenditures ( E ) are always equal, and since net exports equal zero in this problem, E = C + I + G , so that I = Y - C - G or I = 10,000 - 6,350 - 1950 = 1,700. Since unintended inventory investment, I u = I - I P , I u = 1,700 - 1,800 = - 100. d. Leakages equal saving plus taxes = 1,900 + 1,750 = 3,650. Injections equal investment plus government = 1,700 + 1,950 = 3,650. So both leakages and injections equal 3,650. e. Since planned expenditure exceeds income, the economy is not in equilibrium. In this economy, the equilibrium level of income equals A p / s , where s is the marginal propensity to save. Autonomous planned spending, A p , equals C a - cT + I p + G = 1,400 - 0.6(1,700) + 1,800 + 1,950 = 4,100. The marginal propensity to save equals 1 - c = 1 - 0.6 = 0.4. Therefore, the equilibrium level of income equals 4,100/0.4 = 10,250. f. At the equilibrium level of income, there is a government deficit of 200 billion since taxes equal 1,750 and government spending on goods and services equals 1,950. 2. a. The marginal propensity to save, s , equals 1 - c = 1 - .6 = .4. b. Autonomous planned spending, A p , equals C a - cT a + I p + G + NX = 1,500 - 10 r - .6(1,800) + 2,400 - 50 r + 2,000 - 200 = 4,620 - 60 r . Therefore, at an interest rate equal to 5, autonomous planned spending equals 4,620 - 60(5) = 4,320. c. Since the marginal propensity to save equals .4 and the equilibrium level of income equals A p / s , the equilibrium level of income equals 4,320/.4 = 10,800, given the interest rate equals 5. d. Since autonomous consumption changes by four percent of any change in household wealth and the decline in the housing market in 2006–07 and drop in the stock market in the summer of 2007 reduces household wealth by 750 billion dollars, the decrease in autonomous consumption that results from the decline in household wealth equals .04(750) = 30 billion. e. Since the decrease in autonomous consumption that results from the decline in household wealth equals 30 billion, autonomous planned spending decreases by that amount as well. Therefore, the new amount of autonomous planned spending equals 4,320 - 30 = 4,290. Therefore, the new equilibrium level of income equals 4,290/.4 = 10,725, given the interest rate equals 5. f. The multiplier, k , equals Y / A p = (10,725 - 10,800)/(4,290 - 4,320) = ( - 75)/( - 30) = 2.5. g. Since the multiplier equals 2.5 and income must increase by 75 billion to restore income to its initial equilibrium level of 10,800, fiscal or monetary policymakers must take actions that increase autonomous planned spending by 30 billion in order to restore equilibrium income to 10,800. i.

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.

{[ snackBarMessage ]}

### Page1 / 4

Allchapter3problems - Answers to Problems in Textbook 1 a...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online