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Practice Exam Exercises for Chapter 3 key

Practice Exam Exercises for Chapter 3 key - ‘I’ refers...

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BEcon 301, 2009 Practice Exam Exercises for Chapter 3 – Answer key 1. smaller / decrease 2. smaller 3. multiplier 4. false. 5. Y = Z Y 0 = 1 1- .8(1- .25) ´ 450 = 2.5 ´ 450 =1,125; multiplier = 1 1- .8(1- .25) = 2.5 6. a) Equilibrium condition: Y = Z Y = 1 1- .5(1- .12) 2,800 @5,000 b) Multiplier = 1 1- .5(1- .12) = 1 .56 =1.7857 Equilibrium level of output: Y = 4821.43 Change in income: Y = 178.57 c) c 0 = 100 but Y = 178.57 The change in income is larger than the initial reduction in autonomous spending due to the multiplier effect. When demand decreases, production will decrease and with that income decreases as well. This is followed by further decrease in demand, production, income and so on. 7. a) Examples for C: clothes, housing, food Examples for I: buildings, machinery
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Unformatted text preview: ‘I’ refers to capital investment, NOT financial investment i.e. stocks, bonds etc.) Examples for G: roads, arms ‘G’ refers to government spending, NOT government transfers (i.e. social security, unemployment, etc.) b) Equilibrium condition in the goods market: Z = Y When the goods market is in equilibrium the inventory investment is zero . Remember that inventory investment is the difference between production (Y) and sales (Z), and it will be zero in equilibrium because Y = Z (See Chapter 3, page 49) c) First, you need to remember that output equals income. Y = 1320 d) From part c) Y = 1320. The 3% increase in output is 1320 * .03 = 39.6; ∆ G = 19.8...
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