Download billions

ECON 2313
Part 1
1. a = 700
2. b = C/YD = 850/1000 = 0.85
3. C = 700 + 0.85YD = 700 + [(0.85)(4666.66)] = $4,666.66
4. C = b YD = 0.85 YD
YD = - T = - 40.
 C = (0.85)(-40) = -34
Figure 1
C (billions)
4666.66
700
0
4666.66
YD
(billions)
Part 2
1. The multiplier is given by: 1/(1-b) = 1/(1-0.75)=1/0.25 = 4
2. The aggregate expenditure function is given by:
AE = 600 – [(.75)(400)] + .75Y + 600 + 700 – 50 = 1550 + 0.75Y
3. Use the following formula to solve for equilibrium GDP (Y)
a  bT  I P  G  NX
Y 
1 b
Thus we have:
600 – [(.75)(400 )]  600  700 – 50 1550
Y

 6,200
1 - 0.75
.25
AE
(billions)
Figure 2
AE = 1550 + 0.75Y
E
1550
450
6,200
Real GDP
(billions)
4. First we compute the change in equilibrium
GDP (Y)
1
1
Y  I P 
 50 
 (50)( 4)  200
1 b
1  0.75
Note that:
YD = Y = 200
Thus we have:
C = b YD = (0.75)(200) = $150
5. AE = 1550 + 0.75Y.
Now we compute AE when Y = $6,500
AE = 1550 + [(0.75)(6,500)] = $6425
Y > AE by 75; hence we have positive unplanned
inventory investment equal to $75.
Increase in government expenditure,
AE
(billions) ceteris paribus
’
Panel A
AE2
AE1

450
Y1
Y2
Real GDP
(billions)
AE
(billions)
Decrease in interest rates,
ceteris paribus
’
Panel B
AE2
AE1

450
Y1
Y2
Real GDP
(billions)
AE
(billions)
Stock market crash, ceteris
paribus

Panel C
AE1
AE0
’’
450
Y0
Y1
Real GDP
(billions)
AE
(billions)
Increase in net taxes,
ceteris paribus

Panel D
AE1
AE0
’
450
Y0
Y1
Real GDP
(billions)
AE
(billions)
Increase in exports, ceteris
paribus
’
Panel E
AE2
AE1

450
Y1
Y2
Real GDP
(billions)