ECMA06_Tutorial_7_Solution - ECMA06 Tutorial #7 Answer Key...

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ECMA06 Tutorial #7 Answer Key I = 130 – 10(0.06 – 0.06) = 130 X = 330 – 4(0.85 – 0.85) = 330 IM = 0.23Y + 3.5(0.85 – 0.85) = 0.23Y Question 1 Suppose the general wage rate is 20, i.e., w = 20: Disposable income, DI: DI = Y – T + TR DI = Y – 0.25Y + [140 – 0.05Y] = 140 + 0.7Y C = C(Y): C = 14 + 0.9(140 + 0.7Y) + (100 – P) C = 240 + 0.63Y – P The AE function: AE = C + I + G + X – IM AE = [240 + 0.63Y – P] + 130 + 300 + 330 – 0.23Y AE = 1000 + 0.4Y – P The AD function To derive the AD function, we make use of Y = AE. Y = 1000 + 0.4Y – P 0.6Y = 1000 – P Y = 1666 – 1 P ⅔ ⅔ or P = 1000 – 0.6Y In equilibrium, AS = AD: (–200 + 0.2Y)(20/20) = 1000 – 0.6Y Y* = 1500 P* = 1000 – 0.6(1500) = 100 or P* = [–200 + 0.2(1500)](20/20) = 100 Government (budget) deficit: GBB = T – TR – G GBB = 0.25Y – [140 – 0.05Y] – 300 = 0.3Y – 440 GBB = 0.3(1500) – 440 = 10 The government runs a budget surplus of 10. Since the economy is in its long-run equilibrium (i.e., its full-employment), the level of Y at full employment, Y FE , is 1500. Question 2 Suppose the government increases its spending by 32, i.e, G = 332: Part (a) In the short run, the general wage rate is held fixed at 20 (i.e., w = 20): The new AE function: AE = [240 + 0.63Y – P] + 130 + 332 + 330 – 0.23Y AE = 1032 + 0.4Y – P The new AD function ECMA06 Tutorial #7 Answer Key 1
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To derive the AD function, we make use of Y = AE. Y = 1032 + 0.4Y – P
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This note was uploaded on 12/21/2011 for the course ECONOMICS ECMA06 taught by Professor Dr.atamazaheri during the Spring '10 term at University of Toronto- Toronto.

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ECMA06_Tutorial_7_Solution - ECMA06 Tutorial #7 Answer Key...

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