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BSP2001Assignment 3

# BSP2001Assignment 3 - demand for goods Z Keynesian theory...

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BSP 2001 Macro & International Economics Sem 1 2011/2012 Tutorial Assignment Submission From: Tutorial Question Set No: ___3_____ Question Answered: _____1________ Tutorial Group: ___A8, Wednesday 10 – 11 am_____ Team: ___1B__________ Name of Tutor: _____Mark Gan _________ Date: ____1/9/2011_______________ Team Members: (Name & Matric Number) 1) U098775A Ee Hui Fang Margaret 2) A0074501R Hiew Li Suang 3) U098737R Goh Xin Yi Stephanie 4) A0070243U He Yining ------------- --------------------------------------- Marks: _________________________

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Question 1 Given the following equations for a closed economy : Y= C + I + G C = 250 + 0.8YD YD = Y-T I = 200 G = 200 T = 150 a) Solve for disposable income YD YD = Y - T = C + I + G - T = 250 + 0.8YD + 200 + 200 - 150 = 500 + 0.8YD = \$2,500 b) Solve for consumption C C = 250 + 0.8YD = 250 + 0.8(2,500) = \$2,250 c) Compute total demand. Is it equal to production? Explain briefly. Total demand = c 0 + c 1 ( Y-T) + I + G = 250 + 0.8(2500) + 200 + 200 = 2650 Yes,it is equal to production as this is an equilibrium condition which production Y is equal to
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Unformatted text preview: demand for goods Z. Keynesian theory is based on effective demand. d) Compute the multiplier. c 1 = 0.8 Multiplier, k = 1/ (1-c 1 ) = 1/ (1-0.8) =5 e) Assume that G is now equal to 140, use the multiplier (in part d) to calculate the change in output. Solve for equilibrium output Y. G=140 ∆Y= ∆G k ∆Y= (200-140)*5 = 300 f) Assume G is 140 and equilibrium output is given by answer in part e), compute private plus public saving. Is the sum of private and public saving equal to investment? Explain briefly. Private saving = Yd-C = Y-T-C =2350-150-250-o.8(2350-150) =190 Public Saving =I+G-T =200+140-150 =190 I=S +T-G =190+150-140 =200 Thus the sum of private and public saving is equal to investment. At equilibrium, investment must be equal to This is because what firm wants to invest must also be equal to what people and government want to save....
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