Essay on Problem Set 1
Macroeconomics, ECON 2123
(Instructor: Partha Sen; TA: Peter Tsui)

Posted: Friday, 19 September 2014
Due: 5:00 PM Friday, 26 September 2014
(Submit your homework into the homework collection box outside the department office)
100 marks total
Part I: True/False/Uncertain (20 marks, 4 marks each)
1. GDP is the value of all goods and services produced in the economy during a given period.
2. When disposable income equals zero, consumption equals zero.
3. The multiplier is greater than 1 if T = 0 and G = 0.
4. Paradox of saving occurs when the attempts by people to save more lead to a decline …show more content…
Part III: The Goods Market (55 marks)
Note Questions 2(c), 3(c) and 4(c) require short answers—no more than 5 sentences each.
1. Suppose that the economy is characterized by the following behavioral equations: (16 marks) C = 16 + 0.6 YD I = 15 G = 15 T = 10
Solve for the following variables:
(a) Equilibrium GDP (Y)
(b) Disposable income (YD)
(c) Consumption spending (C)
(d) What is the value of marginal propensity to consume (MPC)?
(e) What is the value of marginal propensity to save (MPS)?
(f) Find the multiplier and autonomous spending.
(g) What are private saving and public saving?
2. Use the economy described in problem 1 in Part III. (9 marks)
(a) Solve for equilibrium output. Compute total demand. Is it equal to production?
(b) Assume that G is now equal to 11. Solve for equilibrium output. Compute total demand. Is it equal to production?
(c) Assume that G is now equal to 11, so output is given by your answer to (b). Compute private plus public saving. Is the sum of private and public saving equal to investment? Briefly explain.
3. Consider the following behavioral equations: (15 marks) C = c0 + c1 YD T = t0 + t1 Y YD = Y – T
G and I are both constant. Assume that t1 is between 0 and 1.
(a) Solve for equilibrium output and equilibrium taxes.
(b) What is the multiplier?
(c) Does the economy respond more to changes in autonomous spending when t1 is 0 or when t1

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