Midterm Test #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 (Consumption and Investment) (12 marks)
An economy has no government or foreign sector
.
The equations for expenditure are:
C (Consumption) = 8,700 + 0.64Y
I (Investment) = 2,400 + 0.16Y
a)What is the equation for Aggregate Expenditure? (2 marks)
1 mark:
the
11,100 part of the equation Y = 11,100 + 0.8Y
1 mark: the 0.8Y part of the equation Y = 11,100 + 0.8Y
b) What is equilibrium income? (2 marks)
1 mark: setup
Y = 11,100 + 0.8Y or Y = 11,100/0.8Y
1 mark: answer = 55,500
c) Draw a graph showing your Aggregate Expenditure function and equilibrium
income.
Be sure to completely label your diagram. (3 marks)
1 mark: positively sloped AE with 11,100
intercept
1 mark: 45 degree (or AE = Y) line
1 mark: equilibrium at 55,500 where 45 degree line intersects AE
e) What is the change in inventories if income is 50,000? (2 marks)
1 mark: AE = 11,100 + 0.8*50,000 = 51,100
1 mark:
Change in Inventories = 50,000 – 51,100 = -1,100 (must be negative)
(Give marks if students find 50,000/5 = 10,000 and determine
∆
INV as 10,000 – 11,100)
f) What is the change in equilibrium income if autonomous investment decreases
by - 80? (1 mark)
1 mark: = -80/(1- 0.8) = -400 (must not be positive)
h) Return to the original equilibrium income.
Suppose that potential Income is 60,000.
How much must Investment change