# How does the value of the marginal propensity to

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5. How does the value of the marginal propensity to consume a/ect your answer? Why?(3 marks)B. Consider the following economy: (10 marks)1
C=c(Y°T);I=I;G=G;andT=tC1. Find an algebraic expression for equilibrium income(Y). (5 marks)2. What is the expenditure multiplier? Compare this multiplier with the multiplier whent= 0and comment. (5 marks)C. [Blanchard and Johnson (2015), p.79, question 5] Suppose that a person±s wealthis \$50,000 and that her yearly income is \$60,000.Also, suppose that her money demandfunction is given by: (20 marks)Md= \$Y(0:35°i)1. Derive the demand for bonds. What is the e/ect of an increase in the interest rate of10%(from, say,2%to12%) on the demand for bonds? (5 marks)2. What are the e/ects of an increase in wealth on money demand and on bond demand?Explain in words. (5 marks)3. What are the e/ects of an increase in income on money demand and on bond demand?Explain in words. (5 marks)4. ²When people earn more money, they obviously want to hold more bonds.³What iswrong with this statement? (5 marks)D. Suppose the money demand is given by: (15 marks)Md= \$Y(0:24°i)where\$Yis\$300:Also, suppose that the supply of money is\$60. Assume equilibrium in°nancial markets.1. FindMdfori= 4%andi= 9%? (6 marks)2. GraphMdandMsandcalculate
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