ECONOMICS 304L: INTRODUCTION TO MACROECONOMICS
SPRING 2008
PROBLEM SET
To be worked in class!
See Chs. 8 and 9, Case and Fair, and on Blackboard, see Why A
.Multiplier? and Adding Taxes to the Model
You are given the following information about an economy:
Y
C
I
2000
1200
1000
2500
1600
1000
3000
2000
1000
3500
2400
1000
4000
2800
1000
1)
Suppose that Investment
increases
to 1200. What is the
new equilibrium Y
?
2)
What is the relationship between the change in equilibrium Y and the change
in Investment? In other words, find
change in Y/change in I
.
3) The name of the relationship that you found above is the
spending multiplier.
Why
would you think that Y changes by more than I? (See Why A Multiplier?)
4)
A. Show that the spending multiplier above is equal to
1/1MPC
.
B. Show that the spending multiplier above is equal to
1/MPS
.
1
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5). What is Saving at the new equilibrium Y?
6)
A. Write an equation for the
Consumption function
described above in the form
C = a + bY
B. What is
a?
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 Spring '08
 Ledyard
 Macroeconomics, Equilibrium, new equilibrium, bYd, 304L

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