Download ECN 111 PRINCIPLES OF MACROECONOMICS HOMEWORK 5

ECN 111
PRINCIPLES OF MACROECONOMICS
HOMEWORK 5 (CHAPTER 12) PROBLEMS
DUE: THURSDAY, OCTOBER 30, 2014
Same rules as before:
1. You may submit an assignment with one name or with two names.
2. If you and a partner submit the assignment together, you must both be from the
same section. You will both receive credit.
3. You must submit the homework assignment in your correct section.
4. The assignment can either be hand-written or typed on a computer—I don’t care
as long as I can read it.
5. Assignments will be collected at the end of class on the due date. They must be
submitted by the end of the class period. No Late Assignments!
6. Please staple your homework pages together with this page on top.
By signing below, I pledge my word of honor that I have abided by the
Washington College Honor Code while completing this assignment.
NAME # 1: _______________________________________
WASHCOLL EMAIL: _____________________________
NAME # 2 (optional): ________________________________
WASHCOLL EMAIL: _______________________________
PLEASE CIRCLE YOUR SECTION:
10 (111 William Smith Hall; 11:30 – 12:45 PM)
11 (113 William Smith Hall; 1:00 – 2:15 PM)
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**This homework assignment is due after your second midterm exam. But I am
posting it early so you can practice working with the Chapter 12 material.**
1. (a) Chapter 12 is about “Keynesian” economics, named after John Maynard Keynes. In his
very influential book “The General Theory of Employment, Interest, and Money”, Professor
Keynes identified four categories that make up total spending in an economy. He called them
“aggregate expenditures” or “A.E.”. What are these four categories? [4 points]
(b) With respect to consumption spending (C), what five variables influence our behavior? Out
of these five variables, which one is by far the most important? [2 points]
2. (a) How are household income and household wealth different from each other? [2 points]
(b) How are current income (Y) and current disposable income (YD) different from each other?
(You might want to write the equation to help illustrate the difference.) [2 points]
3. In class I explained how the consumption function describes the relationship between
disposable income and total consumption spending. I also demonstrated that the slope of the
consumption function is called the “marginal propensity to consume” (MPC). The marginal
propensity to consume is the amount that will be consumed out of each additional dollar earned.
Suppose that the MPC has a value of 0.95. If this is true, then a $10 million increase in
disposable income (YD) will have what impact on the value of total consumption in the
economy? (This is a numerical problem; be specific and show calculations!) [4 points]
4. Draw a very neat and clearly labeled graph of the 450-line like we did in class. This is called
the “Keynesian cross”: it is a graph where the two axes represent real GDP (supply) and real
aggregate expenditure (demand).
(a) [3 points] On your graph, you should have a 450-line together with a line that represents
aggregate expenditures (A.E.) for your macroeconomy. On the horizontal axis, identify three
unique levels of real GDP:
(i) a point where real GDP is less than A.E. (label this as Point A);
(ii) a point where real GDP is equal to A.E. (label this as Point B); and,
(iii) a point where real GDP is greater than A.E. (label this as Point C).
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(b) From these three possible levels of real GDP, which one represents the point where our
economy is in the recessionary phase of the business cycle? [1 point]
(c) If your economy starts out at the point you identified in part (b), explain how the economy
will adjust to reach its true macroeconomic equilibrium where supply = demand. (If you want
full points, then your answer should be thorough and involve how inventories change, how
production changes, and how we move along the A.E. line.) [3 points]
5. Using the Keynesian cross model, draw a graph to illustrate and explain what will happen in
an economy when planned aggregate expenditures are greater than real GDP (i.e., A.E. > Y).
How is equilibrium achieved in this economy? [5 points]
6. Suppose that an economy is described by the following equations.
(a) Write the equation for planned aggregate expenditures in this economy. (Make all the
substitutions you can.) [2 points]
(b) Using the equation you just wrote, solve for the amount of autonomous spending in this
economy. This means solve your A.E. equation when income equals zero (Y = 0). [2 points]
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