Problem Set 2 Answer Key New 2 PDF

Preview

Summary

Download Problem Set 2 Answer Key New 2 PDF

Description

Problem Set 1 Answer Key 1.Suppose that the economy is characterized by the following behavioral equations: C = 160 + 0.6YD I = 150 G = 150 T = 100

Solve for the following variables. a. Equilibrium GDP (Y) Y=Z=C+I+G = 160 + 0.6Y D + I + G = 160 + 0.6 ( Y - T ) + I + G = 160 + 0.6 ( Y - 100 ) + 150 + 150 Y = 1000

b. Disposable income (Y D ) YD =Y-T = 1000 - 100 = 900

c. Consumption spending (C) C = 160 + 0.6YD = 160 + 0.6 x 900

= 700

2. Use the economy described in Problem 2. a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.

When it is equilibrium Y = Z = 1000. Output = total demand = production

b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain. Y=Z=C+I+G = 160 + 0.6Y D + I + G = 160 + 0.6 ( Y - T ) + I + G = 160 + 0.6 ( Y - 100 ) + 150 + 110 Y = 900

c. Assume that G is equal to110,so output is given by your answer to part b. Compute private plus public saving. Is the sum of private and public saving equal to investment? Explain. YD =Y-T = 900 - 100 = 800 Private Saving = Y - T - C = 900 - 100 - [ 160 + 0.6Y D ] = 800 - ( 160 + 0.6 x 800 )

= 160 Public Saving = T - G = 100 - 110 = -10 Private Saving + Public Saving = 160 - 10 = 150 = Investment

Anti-Keynesian Non-Multiplier Model A.) This is not a Keynesian economy, but a classical one. As such, given that in this economy output is given by the number of workers, the equilibrium is simply: Y=L and consumption is C = c_0 + c_1(L-T) B.) C=co+C1(L-T) so a drop in C0 will lead to an equivalent drop in C. We no longer have a Keynesian multiplier effect because our output Y does not move freely, so there is no feedback loop from a change in C0 and we never get the geometric series that leads to the Keynesian multiplier. C.) When there is some ∆T > 0, consumption decreases in the economy, but only by c1(∆T). This is different from the Keynesian multiplier model (Keynesian cross) we saw in class. In the multiplier model, there is the initial ∆T, which is followed by subsequent -c1(∆T), -(c1)2(∆T)----(c1)n(∆T) as n goes to infinity. This, for taxes in the multiplier model, yields a total change of (∆T (c1)/(1 - c1)), which is greater than in the above economy with exogenous L. Consumers are better off in this economy.

D.) This problem highlights the role of the assumption that output can freely move around and satisfy aggregate demand by virtue of the condition Y = Z in the Keynesian-cross model. Here, output cannot move around and it is fixed by the number of workers, thus, fiscal policy and taxes do not influence the level of output, and there is no multiplier. The assumption that output will satisfy aggregate demand is reasonable in the short run. In the long run, according to conventional theory, we should expect output to be determined by the potential of production of the economy, for instance the number of workers as in this problem. Question 4...