Assignment 3
1. The following equations describe an economy. (think of C, I, G, etc., as being measured in
billions and i as a percentage; a 5 percent interest rate implies i = 5.)
C = 0.8(1-t)Y
T = 0.25
I = 900-50i
G = 800
L = 0.25Y 62.5i
M/P = 500
a)
b)

Question 3
Now we look at the role taxes play in determining equilibrium income. Suppose we havean economy
of the type in Sections 9-4 and 9-5, described by the following functions:
C = 50 + 0.8YD
I = 70
G = 200
TR = 100
T = 0.20
(a) Calculate the equilib

Question 2
Suppose consumption behavior were to change in problem 1 so that C = 100 + 0.9Y,while I remained
at 50.
(a) Would you expect the equilibrium level of income to be higher or lower than in 1a)? Calculate the
new equilibrium level, Y, to verify th

Question 5
Suppose Congress decides to reduce transfer payments (such as welfare) but to increasegovernment
purchases of goods and services by an equal amount. That is, it undertakes achange in fiscal policy
such that
G TR
.
(a) Would you expect equilib

Here we investigate a particular example of the model studied in Sections 9-2 and 9-3with no
government. Suppose the consumption function is given by C = 100 + 0.8Y,while investment is given
by I = 50.
(a) What is the equilibrium level of income in this c

Assignment 3
2 Continue with the same equations.
a) What is the value of G which corresponds to the simple multiplier (with taxes) of chapter 9?
b) By how much does an increase in government spending of G (300) increase the level of
income in this model,

Macro Assignment 3
Jeff Frey
1. The following equations describe an economy. (think of C, I, G, etc., as being measured in
billions and i as a percentage; a 5 percent interest rate implies i = 5.)
C = 0.8(1-t)Y
T = 0.25
I = 900-50i
G = 800
L = 0.25Y 62.5i