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100BKletzerfall2008

100BKletzerfall2008 - University of California Santa Cruz...

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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.
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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)?
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