problem_set_2 Mitch

# problem_set_2 Mitch - Net Exports(X \$8000 \$6900 \$1,000...

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Mitch Klipa May 14, 2008 Economics 2 Problem Set 2 This problem set is an application of the nature and causes of economic fluctuations, which we learnt in class. 1. Describe what happens to the expenditure line (whether it shifts up or down) in each of the following cases. a) Government spending on aircraft safety rises. This will cause the expenditure line to shift up. b) The Koreans decide to spend \$10 billion on aircraft built in the United States. This will cause the expenditure line to shift up. c) Firms become very optimistic about the future. This will cause the expenditure line to shift up. d) The European Union imposes a ban on US produced dairy products. This will cause the expenditure line to shift down. e) Government reduces its spending on homeland security. This will cause the expenditure line to shift down. 2. Use the information in the table to answer the following questions. Real GDP (Y) Consumption (C) Investment (I) Government Purchases (G)

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Unformatted text preview: Net Exports (X) \$8000 \$6900 \$1,000 \$1,000 ─\$500 9000 7700 1,000 1,000 ─500 10,000 8,500 1,000 1,000 ─500 11,000 9,300 1,000 1,000 ─500 12,000 10,100 1,000 1,000 ─500 a) What is the equilibrium level of real GDP? 10,000 – Because spending equals real GDP. b) Use the 45-degree line and the expenditure line and show graphically the equilibrium level of real GDP (spending balance) obtained in part (a). c) Calculate the marginal propensity to consume (MPC). MPC = ∆C/ ∆Y = 800/1000 = .8 d) Suppose government purchases increase by \$200 billion. What will be the new equilibrium level of real GDP? Use the multiplier formula to determine your answer. Multiplier = 1/(1-.8) = 1/(.2) = 5 ∆Y = 5∆G = 5(200) = 1,000 billion = The real GDP would increase by 1 trillion e) Use the 45-degree line and the expenditure line to illustrate how an increase in government purchases in part (d) affects real GDP....
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problem_set_2 Mitch - Net Exports(X \$8000 \$6900 \$1,000...

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