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Given the following model of an Economy as follows:-
(10 marks)
C = 50 + 0.7 Yd (Yd = Y-T) (Consumption & Expend)
I = 100
(Investment Expend)
X = 20
(Exports )
M = 10 – 0.27
(Imports)
T=25 interepret the consumption Function
i)
Determine Equilibrium level of
ii)
Consumption level at Equilibrium level of Income
iii)
Total import at equilibrium Income
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- Define the concept of equilibrium in the simple expenditure model we developed in class. Now, explain what signal in spending will tell us that the economy is not in equilibrium? Lastly, assume that we find that actual Y is greater than equilibrium Y, Ye thus actual current Y>Ye. Explain the reaction by firms to this situation and what you expect to happen to the actual level of Y because of this corporate reaction. Show the graph of the initial situation and the resulting change in Y due to the corporate reaction.Assume the following model of the expenditure sector: S=C+I+G+Nx TR=100 C=420+(4/5)YD I=160 G=180 Nx=-40 YD=Y+TR-TA TA=(1/6)Y If the government would like to increase the equilibrium level of output (Y) to the full employment level Y*=2,700, by how much should government purchases (G) be changed?Consider an economy where the aggregate planned expenditure (AE) components are given by: Consumption (C) = 1000 + 0.8Y Investment (I) = 200 Government Expenditure (G) = 250 Exports (Ex) = 400 Imports (Im) = 200 + 0.133Y Write the AE equation (simplified). Identify the autonomous component and the induced component. Graph the AE curve. Find and identify on the graph the equilibrium expenditure. Show on your graph the effect of an increase of 60 in government expenditure and find the new equilibrium expenditure. Find the expenditure multiplier.
- 1. Given the following table. Income (RM million) Consumption (RM million) 0 100 100 150 200 200 300 250 400 300 500 350 How much is the autonomous consumption in the economy? How much investment should be increased to achieve an income of RM400 million? Calculate the MPS. Derive the consumption function. 2. Given the following information, C = 500 + 0.7Yd T = 0.2Y I = 400 G = 100 Calculate the national income equilibrium. Based on your answer in (a), draw the aggregate expenditure graph. Suppose that investment changes by 300, what would happen to the national income equilibrium? Suppose that tax (T) changes, and the new T is T = 0.2 Y + 50, calculate the new national income equilibrium. 3. Given the following information, S = -200 + 0.3Y I = 100 Calculate the national income equilibrium by using the Leakage-Injection approach. Calculate the value of saving. Draw the aggregate expenditure graph.In an economy, autonomous consumption expenditure is $50 billion, investment is $200 billion, and government expenditure is $250 billion. Exports are $500 billion and imports are $450 billion. Assume that net taxes and imports are autonomous and price level is fixed. a)What is the consumotion function? b)What is the equation of the aggregate expenditure curve? c)Calculate equilibrium expenditure. d)Calculate the multiplier. e)If investment decreases to $150 billion, what is the change in equilibrium expenditure ?Suppose an economy had aggregate demand components with the following relationships: Consumption spending, C=140+.60*(DY) Investment spending,I=25+.15*Y Government Spending, G= 0 Net Export Spending,X=0 Tax collections, Tx=0 a. What is the equilibrium income for this economy? b. If the government decided to increase G spending by 6, what would be the new equilibrium income for this economy? c. If instead the government decided to reduce Tx (taxes) by 10, what would be the new equilibrium income for the economy? d. If instead the government decided to increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium for this economy?
- Table 2 shows elements in the national income accounts of an economy. Assume the economy is currently in equilibrium. Elements £ billions Consumption (total) 80 Investment 9 Government Expenditure 6 Imports 15 Exports 8 What is the current equilibrium level of income? What is the level of injections? What is the level of withdrawals? If national income now rises by £22 billion and as a result, the consumption of domestically produced goods rises to £80 billion. Calculate the marginal propensity to consume (MPC)What is the value of the multiplier? What is the value of the multiplier? Comment on the results in part (3) and (4).Assume that the Malaysian Prime Minister proposes to implement an economic recovery plan valued at RM300 million comprising of tax cuts and government transfer payments to households. If taxes fall by RM150 million and the spending on government transfer payments increases by RM150 million, which component ( transfer payments to households or tax cuts) of the recovery plan would have the larger effect on the equilibrium of aggregate expenditure, assuming other things are unchanged? a) Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy i. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates ii. In view of your answers, explain the following statement: “Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and…. Suppose the United States economy is repre- sented by the following equations: Z = C + I + G, C = 500 + 0.75YD, T = 600, I = 300, YD = Y − T , G = 2000 Given the above variables, calculate the equilibrium level of output. assume that government spending decreases from 2000 to 1900. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?
- Derive the consumption function and use this relation in the aggregate demand function to derivean equation for the equilibrium in the goods market . Why the AD line is upward sloping?Suppose the government spending falls by 100 and in this case marginal propensity to consumeis 0.8. what is the value of change in output. Draw a diagram to show the shift in AD line due tothis change in government spending and output.The graph models an economy in equilibrium with a real GDP of $180 billion. Suppose that consumers' expectations about future incomes change, causing unplanned inventory investment to increase by $30 billion. Shift the planned aggregate expenditure (AE) line to show the effect of this change. *Image* 1) This change will cause the equilibrium level of real GDP to a) decrease. b) remain unchanged. c) increase. 2) By how much will GDP change once the new equilibrium is reached? If GDP will decrease, be sure to include a negative sign. GDP change: $ ________ billionSuppose that for a particular economy, for some time period, consumption was given by theconsumption function C = 300 + 0.9YD, investment was equal to 200, government expenditure wasequal to 100, net taxes were fixed at 100, exports were equal to 200, and imports were given by theimports function Z = 10 + 0.1YD. Note that YD represents disposable income. a.Suppose households earn $150 more in their disposable income. How much more would theyconsume in total? How much go to domestic goods and how much go to imported goods? Howmuch would they end up saving? b.What is the level of equilibrium income? What about the level of consumption and import? c.What are the values of the government spending multiplier, tax multiplier and balanced-budgetmultiplier? d.Suppose the investment level suddenly declined by 20. How should the government stabilize theeconomy? Please provide all options in detail
