{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

100BKletzerfall2008

100BKletzerfall2008 - University of California Santa Cruz...

This preview shows pages 1–3. Sign up to view the full content.

University of California, Santa Cruz Fall Quarter 2008 Econ 100B INTERMEDIATE MACROECONOMICS Problem set 1 Answer Key 1. Suppose that the following behavioral equations characterize an economy (in billions of dollars): C = 2000 + 0.9 Y d I = 1800 G = 1800 T = (1/3) Y (a) Solve for equilibrium real GDP, Y. Y = C + I + G Y = 2000 + 0.9 Y d + 1800 +1800 Y = 5600 + 0.9 Y d Y = 5600 + 0.9 (Y – 1/3 Y) Y = 5600 + 0.9 * 2/3 Y Y = 5600 + 0.6Y Y – 0.6 Y = 5600 Y = [1 / (1-0.6) ] 5600 Y = \$14,000 Thus the equilibrium real GDP is \$11000. (b) Solve for equilibrium disposable income, Y d We get the disposable income by subtracting taxes (net of transfers) from the equilibrium real income. Y d = Y - T Y d = (Y – 1/3 Y) Y d = 2/3 * 14,000 Y d = \$ 9,333.33 (c) Solve for consumption expenditures. The total consumption expenditure is given as C = 2000 + 0.9 Y d C = 2000 + 0.9 * 9,333.33 C = \$ 10,400 2. Calculate the multiplier for the economy of problem 1.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
As shown in the above question the multiplier is [1 / (1-0.6)] or 2.5. For a given \$100 increase in government expenditure, the real GDP increases by \$250 billion. (b) How much do taxes rise with this increase in real GDP? Given T = (1/ 3) *Y we have (c) What is the net change in the government deficit (G-T)?
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}