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Week 2 Homework

Week 2 Homework - 2 ΔAp = 120 −cΔTa = −.6ΔTa 120.6...

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EC301 2011 Week 2 Problem 3-2 a. Marginal propensity to save = 1 – c = 1-.6 = .4 b. Autonomous Planned spending equals: Ca − cTa + Ip + G + NX = 1,500 – 10r - .6(1800) + 2400 – 50r + 2,000 – 200 = 4,620 – 60 (3) = 4,440 c. Equilibrium level of income: A p /s = 4,440/.4 = 11,100 d. The decline in consumption that results from the decline in household wealth: .04(3 trillion) = 120 Billion e. New autonomous planned spending: 4,440 – 120 = 4,320 New equilibrium level of income: 4,320/.4 = 10,800 f. The multiplier k equals: ΔY/ΔAp = (10,800 – 11,100)/(4,320 – 4,440) = -300/-120 = 2.5 g. The multiplier equals 2.5 and income must increase by 300 billion to restore income to its initial equilibrium level of 11,100, fiscal or monetary policymakers must take actions that increase autonomous planned spending by 120 billion in order to restore equilibrium income to 11,100. 1. Fiscal policymakers must increase government spending by 120 billion to restore equilibrium income to 11,100, given no changes in taxes or the interest rate.

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Unformatted text preview: 2. ΔAp = 120 −cΔTa = −.6ΔTa 120/-.6 = -200 ΔTa = -200 Fiscal policymakers must cut taxes by 200 billion to restore equilibrium income to 11,100, given no changes in government spending or the interest rate. 3. ΔAp = ΔG − .6ΔTa ΔAp = 120 Δ G = Δ T a .4Δ G = 120 Δ G = 300 Fiscal policymakers increase both government spending and taxes by 300 billion to restore equilibrium income to 11,100, given no changes in the government budget balance or the interest rate. 4. According to the equation in b. above, autonomous planned spending increases by 60 billion for every one percentage point drop in the interest rate. Since autonomous planned spending must increase by 120 billion to restore equilibrium income to 11,100, monetary policymakers must decrease the interest rate by 2 percentage points to restore the equilibrium income to 11,100. Problem 4-1 a. b. c. d. e. I tried combining c-e on this graph....
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Week 2 Homework - 2 ΔAp = 120 −cΔTa = −.6ΔTa 120.6...

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