ECMA06_Tutorial_5_Solution

# ECMA06_Tutorial_5_Solution - ECMA06 Tutorial#5 Answer Key...

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

ECMA06 Tutorial #5 Answer Key If r is held fixed at 0.06 & E is held fixed at 0.85 US\$ per C\$, then I = 40 – 4.5(0.06 – 0.06) = 40 X = 180 – 2(0.85 – 0.85) = 180 IM = (1/4)Y + 2(0.85 – 0.85) = (1/4)Y Part (a) Disposable income, DI: DI = Y – T + TR DI = Y – (5/11)Y + [120 – (1/11)Y] = 120 + (5/11)Y C = C(Y): C = 10 + (11/12)[120 + (5/11)Y] C = 120 + (5/12)Y The AE function: AE = C + I + G + X – IM AE = [120 + (5/12)Y] + 40 + 320 + 180 – (1/4)Y AE = 660 + (1/6)Y Equilibrium output: In equilibrium, Y = AE: Y = 660 + (1/6)Y Y* = 792 Government (budget) deficit: GBB = T – TR – G GBB = (5/11)Y – [120 – (1/11)Y] – 320 = (6/11)Y – 440 GBB = (6/11)(792) – 440 = – 8 The government runs a budget deficit of 8. Part (b) Suppose government spending increases by 55, i.e., G = 375: The new AE function: AE = [120 + (5/12)Y] + 40 + 375 + 180 – (1/4)Y AE = 715 + (1/6)Y New equilibrium output: In equilibrium, Y = AE: Y = 715 + (1/6)Y Y* = 858 Government (budget) deficit: GBB = (5/11)Y – [120 – (1/11)Y] – 375 GBB = – 27 The government budget deficit increases by 19 to 27. The (government expenditure) multiplier: dG * dY = ΔG * ΔY = 55 792 - 858 = 1.2 Part (c) In part (b), we showed that an increase in G by 55 will increase (autonomous) AE by 55.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern