Principles of Macroeconomics: Midterm #2, Sample #1 Answers
Part I: Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.
1.
Equilibrium GDP (no Net Tax function) (14 marks)
An economy has no taxes and no transfer payments
.
The expenditure equations are:
Consumption
= 1,500 + 0.8Yd
Investment = 1,800
Government Spending = 2,400
Exports = 2,700
Imports
= 600 + 0.1Y
a)
What is the equation for Aggregate Expenditure? (2 marks)
1 mark: correct autonomous part = 7,800
1 mark: correct induced part = 0.7Y
i.e. 2 marks for AE = 7,800 + 0.7Y
b)
What is equilibrium income? (2 marks)
1 mark: set-up of some sort:
Y = 7,800 + 0.7Y or Y = 7,800/(1 – 0.7)
1 mark: correct answer
Y = 26,000
(no partial marks since they can check from c))
c)
Calculate each of Consumption and Imports at equilibrium. (2 marks)
1 mark:
C = 22,300
from 1,500 + 0.8(26,000)
1 mark:
IM = 3,200 from 600 + 0.1(26,000)
Both must be correct since they can check that C + I + G + X
- IM = Y
d)
Draw a graph showing your Aggregate Expenditure function and equilibrium
Income.
Be sure to completely label your diagram. (2 marks)
1 mark: positively sloped AE with 7,800 intercept
1 mark: Y = 26,000 at intersection 45 degree and AE
e)
What is the recessionary gap if potential GDP is 28,400? (1 mark)
1 mark: = 2,400 from 28,400 – 26,000
f)
What is the change in inventories if GDP is 28,400? (2 marks)
1 mark: AE = 27,680 from 7,800 + 0.7 (28,400)
1 mark: change in Inventories = +720
from 28,400 – 27,680 (can’t be negative)
g)
What is the change in equilibrium income if the Exports decrease by 90? (1 mark)