The following information is for a mixed nony. The letters Y, Ca, Ig, Xn, G, and

Question

The following information is for a mixed nony. The letters Y, Ca, Ig, Xn, G, and T stand for GDP consumption, gross investment, net exports, government purchases, nd net taxes respectively. Figures are in billions of dollars Ca = 25 + .75 (Y-T) 19 = 1g0 = 50 G=G0 = 70 3 .Refer to the above in formation. The equilibriun level of GDP EOE this economy is: (a) $600. (b) $530. (C) $415 (d) $400. (e S320 33. Refer, to the above information. If government desired to raise the equilibrium GDP to $650, it could: (a) raise G by $45 reduce T by $10. (b) raise G by $40 and reduce T by $30. (c) raise G by $30 or reduce T by $40. (d) raise both G and T by $40. (e) reduce, G by $30 and increase T by $40 34. Refer to the above information. If the econony's tax schedule was T -0.2y rather than T-T0 = 30, the equilibrium GDP would be: (a) $387.5 (b) $518.5. (c) $316. (d) $412. (e) $345. 35. In a private closed econony (a) the marginal propensity to save is 25, (b) consumption eguals income at $120 billion, ,and (c) the levei of investment is $40 billion. What is the equilibrium level of income? (a) $280 billion (b) $320 billion (c) $262 billion (d) $198 billion (e) $228 billion Answer 2. B. 33. C 34. A 35.A wat to Kow how to get-te Asner.

Explanation / Answer

(32) (b)

In equilibrium, Y = Ca + Ig + G + Xn

Y = 25 + 0.75(Y - 30) + 50 + 70 + 10

Y = 155 + 0.75Y - 22.5

(1 - 0.75)Y = 132.5

0.25Y = 132.5

Y = 530

(33) (c)

Increase in GDP = 650 - 530 = 120

MPC = 0.75

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4

So, to increase GDP by $120, Required increase in G = $120 / 4 = $30

Tax multiplier = - MPC / (1 - MPC) = - 0.75 / 0.25 = - 3

So, to increase GDP by $120, Required decrease in Tax = $120 / 3 = $40

(34) (a)

In equilibrium, Y = Ca + Ig + G + Xn

Y = 25 + 0.75(Y - 0.2Y) + 50 + 70 + 10

Y = 155 + 0.75 x 0.8Y

Y = 155 + 0.6Y

(1 - 0.6)Y = 155

0.4Y = 155

Y = 387.5

(35) (a)

MPS = 0.25, so MPC = 1 - MPS = 1 - 0.25 = 0.75

Consumption function: C ($ Billion) = A + 0.75Y [A: Autonomous consumption when Y is zero]

When C = Y, we get

Y = A + 0.75Y

0.25Y = A

A = 0.25 x $120 billion = $30 billion

Consumption function: C ($ Billion) = 30 + 0.75Y

In equilibrium, Y = C + I

Y = 30 + 0.75Y + 40

0.25Y = 70

Y = $280 billion

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