ECN 101 Intermediate Macroeconomics Homework 4

ECN 101 Intermediate Macroeconomics Homework 4

1. Basic Multiplier Model: Review

Suppose the components of the Aggregate Expenditure as follows:

Y = C + I + G + NX
C = 200 + .8Yd = 200 + .8 (Y – T)
I = 800
G = 600
NX = 200
T = 800

a) Is the government budget balanced, in deficit or in surplus? Explain.
b) What is the value of the expenditures multiplier?
b) Calculate the equilibrium income.
c) If Government Spending (G) increases by 300, calculate the value of the new equilibrium income? How much did equilibrium income change as a result of the increase in investments? What is the effect on the budget?

2. AS and AD
A. Using your AS/AD model, illustrate how the following affects the economy in the short run (SRAS is horizontal).

i. The government increases spending.
ii. Wages decrease significantly as a result of a large wave of immigration.
iii. The government increases taxes in order to minimize the budget deficit.

B. Redo part A, using your long run AS-AD model (LRAS is vertical). Make sure you illustrate the transition from short run to long run.

3. Finding the Equilibrium
Assume that the economy can be described as the following:

C= .8(Y-T)
I = 800 – 2000 r
G = 1000
T = 1000
(M/P)D = .4Y – 4000r
(M/P)S = 1200

b) Derive the equation for the IS curve, expressing Y as a function of r.
c) Derive the equation for the LM curve, expressing Y as a function of r.
d) Find the equilibrium values for Y, r, C, I.
e) Compute for the new equilibrium values for Y, C, I and r if G increases to 1200.

Here’s the SOLUTION

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