Week 2 Homework

Week 2 Homework - 2. Ap = 120 cTa = .6Ta 120/-.6 = -200 Ta...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

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

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 2. Ap = 120 cTa = .6Ta 120/-.6 = -200 Ta = -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. Ap = G .6Ta Ap = 120 G = T a .4 G = 120 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....
View Full Document

This note was uploaded on 11/26/2011 for the course ECON 301 taught by Professor Kornilov during the Spring '11 term at Park.

Page1 / 2

Week 2 Homework - 2. Ap = 120 cTa = .6Ta 120/-.6 = -200 Ta...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online