Problem 1:
Compare a $100,000 median family income in 1980 to the same income in 1990, 2000, and 2010. What are the differences in the available products? What are the differences in the quality of those products? Considering this, in which of those years would you rather live? Why?
Problem 2:
Assume that the consumption schedule for a private open economy is such that consumption C = 20 + 0.80Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 40, G =20 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + G+ Xn.
a. Calculate the equilibrium level of income or real GDP for this economy.
b. What happens to equilibrium Y if G changes to 20? What does this outcome reveal about the size of the multiplier? What does this outcome reveal about the impact of fiscal policy?