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ch.0probset2

# ch.0probset2 - 1 ECONOMICS 304L INTRODUCTION TO...

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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 1/1-MPC . 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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