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MacroeconomicsChapter 3

MacroeconomicsChapter 3 - ANSWERS TO END-OF-CHAPTER...

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ANSWERS TO END-OF-CHAPTER PROBLEMS CHAPTER 3 Quick Check 1. a. True. b. False. Government spending without transfers was 19% of GDP. c. False. The propensity to consume must be less than one for our model to be well defined. d. True. e. False. f. False. The increase in output is one times the multiplier. g. False. 2. a. Y=160+0.6*(Y-100)+150+150 Y=1000 b. Y D =Y-T=1000-100=900 c. C=160+0.6*(900)=700 3. a. Equilibrium output is 1000. Total demand=C+I+G=700+150+150=1000. Total demand equals production. This is the equilibrium condition used to solve for output. b. Output falls by: 40*multiplier = 40/.4=100. So equilibrium output is now 900. Total demand=C+I+G=160+0.6*(800)+150+110=900. Again, total demand equals production. c. Private saving=Y-C-T=900-160-0.6*(800)-100=160. Public saving =T-G=-10. National saving (or in short, saving) equals private plus public saving, or 150. National saving equals investment. This statement is mathematically equivalent to the equilibrium condition that total demand equals production. Thus, national saving equals investment is an alternative statement of the equilibrium condition.

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