Download Adam Czerniak, Ph.D. Department of Economics II - E-SGH

Macroeconomics I
Output and aggregate demand
Mar, 21st, 2017
Problem 1
We consider a closed economy without a government. How will this initial change in the investment demand
influence the income and consumption spending of households? Complete the table in order to calculate the
new equilibrium:
Y
C = 30 + 0.8Y
I
AD = C + I
Y – AD
Unplanned
Output
stocks
Step 1
300
30
Step 2
300
5
Step 3
275
5
Step 4
255
5
175
5
270
300
0
Zero
Constant
New
equilibrium
A. Calculate the value of the multiplier.
B. What other factors can cause output to be lower than planned aggregated demand?
Problem 2 (S/B or W/B extended)
Consider a closed economy with no government. Consumption (C) is related to income (Y) by the equation:
C=A+cY
A. What is the marginal propensity to consume?
B. What is the average propensity to consume?
C. How is the level of savings related to income in this economy?
Suppose that A = 400, c = 0,75 and the level of investment is 500.
D.
E.
F.
G.
At what level of national income would savings be zero?
Calculate the multiplier for this economy.
What would be the equilibrium level of income?
Draw a diagram presenting graphs of consumption function, aggregate demand function and 45° line.
Mark the equilibrium.
H. What would be the impact of the increase in investment of 100? Show the new equilibrium on the
diagram. What would be the new equilibrium level of income?
I. What would be the impact of the increase in the marginal propensity to save by 5 percentage points?
Show the new equilibrium on the diagram. What would be the new equilibrium level of income?
J. Once again we go back to H and I. Suppose that initially the economy had been in the equilibrium. In
which of the two cases would the excess (aggregate) demand occur and in which the demand would be
insufficient?
K. Explain the process by which new equilibriums are attained.
Adam Czerniak, Ph.D.
Department of Economics II
Problem 3
Suppose investment demand is 30 and the saving function is S=-30+0.2Y.
A. What is equilibrium output?
B. What is the planned level of saving at the equilibrium output?
C. What is the consumption function?
D. What is the level autonomous consumption?
E. Use the consumption function to confirm your answer to b.
Problem 4
The marginal propensity to consume is c = 0.9. Calculate the multiplier. How would it change, if the
government ‘showed up’ and set an income tax with the tax rate t=20%? Then, how would the multiplier
change if the economy became open and the marginal propensity to import was m = 0.1?
True or false
1.
2.
3.
4.
5.
6.
If actual investment is greater than planned investment, unplanned inventories decline.
Firms react to an unplanned inventory investment by increasing output.
If planned saving exceeds planned investment, injections are greater than leakages.
If planned investment increases, equilibrium will be restored only when saving has increased
by exactly the amount of the initial increase in planned investment, assuming there is no
government or foreign sector.
If aggregate expenditure decreases, then equilibrium output increases.
The larger the MPC, the smaller the multiplier.
Multiple Choice
1. If you earn additional $500 in disposable income one week for painting your
neighbors’ house:
a) the total of your consumption and saving will increase by more than $500.
b) the total of your consumption and saving will increase by $500.
c) the total of your consumption and saving will increase by less than $500.
d) your consumption will increase by more than $500, even if your MPS is 0.1.
2. In one year, a firm increases its production by $9 million and increases sales by $8 million. All
other things in the economy remaining the same, which of the following is true?
a) GDP increases by $8 million and inventory investment decreases by $1
million.
b) GDP increases by $9 million and inventory investment increases by $1 million.
c) Inventory investment decreases by $1 million.
d) GDP increases by $8 million and investment increases by $1 million.
3. According to the ʺparadox of thrift,ʺ as individuals increase their saving:
a) income in the economy increases because there is more money available for
firms to invest.
b) income in the economy increases because interest rates will fall and the
economy will expand.
c) income in the economy will remain constant because the change in
consumption equals the change in saving.
d) income in the economy will fall because the decreased consumption that
results from increased saving causes the economy to contract.
Adam Czerniak, Ph.D.
Department of Economics II
Refer to the information provided in table below to answer the questions that follow.
All Figures in Billions of Dollars
Aggregate Output
Aggregate Consumption
Planned Investment
200
300
100
400
450
100
600
600
100
800
750
100
1,000
900
100
1. At an aggregate output level of $400 billion, planned expenditure equals:
a) $550 billion. b) $450 billion. c) $500 billion. d) $850 billion.
2. At an aggregate output level of $800 billion, aggregate saving:
a) equals -$50 billion. b)equals $0. c)equals $50 billion.
d) cannot be determined from this information.
3. At an aggregate output level of $200 billion, the unplanned inventory change is:
a) -$150 billion. b) -$200 billion. c) -$50 billion. d) $100 billion.
a) At an aggregate output level of $600 billion, the unplanned inventory change is:
a) -$100 billion. b) -$50 billion. c) $0. d) $50 billion.
b) If aggregate output equals …………………., there will be a $100 billion unplanned
decrease in inventories.
a) $200 billion. b) $400 billion. c) $600 billion. d) $800 billion
6. The equilibrium level of aggregate output equals:
a) $400 billion. b) $600 billion. c) $800 billion. d) $1,000 billion.
7. Which of the following statements is FALSE?
a) At output levels greater than $800 billion, there is a positive unplanned inventory
change.
b) If aggregate output equals $1000 billion, then aggregate saving equals $100.
c) At an output level of $400 billion, there is a $150 billion unplanned inventory
decrease.
Adam Czerniak, Ph.D.
Department of Economics II