Objectives
The purpose of the Unit Exercises is to assess the student's ability to apply the economics concepts learned in the unit to practical problem-solving scenarios.
Instructions
Students are to complete the following exercises in Word (or some other compatible word processor) and submit by 11:00 p.m. on Sunday of
Units 2, 4, 6, 8, 10, and 11.
1. Suppose you are given the following information for an economy without government spending, exports, or imports. C is desired consumption, I is desired investment, and Y is income. C and I are given by:
C = 1300 + 0.85Y
I = 450
a. What is the equation for the aggregate expenditure (AE) function?
b. Applying the equilibrium condition that Y = AE, determine the level of equilibrium national income.
c. Using your answer from part (b), determine the values of consumption, saving, and investment when the economy is in equilibrium.
2. Consider the simplest macro model with demand-determined output.
The equations are:
C = 150 + 0.8Yd, Yd = Y-T,
I = 400, G = 700,
T = .2Y, X = 130, and
IM = 0.14Y.
a. What is the Marginal Propensity to Consume (MPC) in this model?
b. What is the Marginal Propensity to import?
c. What is the total autonomous expenditure?
d. What is the equilibrium GDP?