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MGEA06H3 Lecture Notes - Exchange Rate, Kolmogorov Space, Consumption Function

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blueplatypus977
29 Jan 2013
School
UTSC
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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Document Summary

Extend the simple ae model by including government and foreign sector in the model. Discuss national saving in an open economy. Consider the effects of a change in aggregate expenditure on national income and budget balance. Enriching the model including government and foreign. The government enters the model in the 3 ways: spending on final goods and services, g. It is the government expenditure on final goods and services. Assumption: g is an autonomous variable, (i. e. , its value is given): collecting taxes, t. Assumption: taxes are positively related to income because the government collects taxes from households and firms to finance its spending. T = t0 + t1y, where t0 = autonomous taxes t1 = tax rate & 1 > t1 > 0. Assumption: transfer payments are inversely related to income. They are payments from the government to individuals that are not in exchange for goods and services. Examples include employment insurances (ei), public pension, and etc.

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Related Questions

The Modified Keynesian Model

Y = C + I + G + X – IM … equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI … consumption function

I = 50 … autonomous investment

G = 100 … autonomous government spending

X = 200 … autonomous exports

IM = 100 … autonomous imports

And also:

DI = Y – T + Tr T = 0 … autonomous taxes

Tr = 0 … autonomous transfer payments

YF = 5000 … full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? … the value of the MPS?

5. Calculate the “oversimplified” expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question “6”.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question “6”. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question “9”). What would be the value of the national debt after this policy action?

Question 1

Which of the following describes the relationship between the change in inventories and aggregate expenditure?

A.

Aggregate expenditure equals the change in inventories minus GDP.
B.

The change in inventories equals GDP divided by aggregate expenditures.
C.

Aggregate expenditures equals GDP divided by the change in inventories.
D.

Aggregate expenditures equals GDP minus the change in inventories.
E.

The change in inventories equals GDP multiplied by aggregate expenditure.

1 points

Question 2

Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?

A.

Disposable income and consumption fall by $10 billion
B.

Disposable income and consumption rise by $10 billion
C.

Disposable income rises by $10 billion and consumption rises by $8 billion
D.

Disposable income falls by $10 billion and consumption falls by $8 billion
E.

Disposable income rises by $10 billion and consumption falls by $8 billion

1 points

Question 3

If aggregate expenditure at a particular level of income is less than output,

A.

output will increase
B.

output will decrease
C.

output will remain the same
D.

output will rise slightly and then level off
E.

we cannot determine what will happen to output

1 points

Question 4

The consumption function

A.

illustrates the relationship between real disposable income and real consumption spending
B.

illustrates the relationship between the price level and real consumption spending
C.

is the relationship between productivity and real consumption spending
D.

shows how real consumption increases when real disposable income decreases
E.

illustrates the relationship between real consumption spending and employment

1 points

Question 5

The focus of the short-run macro model is on the role of

A.

spending in explaining economic fluctuations
B.

labor in explaining economic fluctuations
C.

financial markets in explaining economic fluctuations
D.

output in explaining economic fluctuations
E.

resources in explaining economic fluctuations.

1 points

Question 6

If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?

A.

Aggregate expenditure is greater than output, so inventories will increase and output will be raised.
B.

Aggregate expenditure is greater than output, so inventories will decrease and output will be increased.
C.

Aggregate expenditure is less than output, so inventories will decrease and output will be raised.
D.

Aggregate expenditure is less than output, so inventories will increase and output will be lowered.
E.

Aggregate expenditure is greater than output, so inventories will increase and output will be lowered.

1 points

Question 7

If the marginal propensity to consume is 0.7, the expenditure multiplier is

A.

7.0
B.

0.7
C.

3.0
D.

3.3
E.

not determinable without additional information.

1 points

Question 8

Aggregate expenditure is the sum of

A.

all types of spending by households and firms
B.

spending and savings by households
C.

spending by households and governments on final goods and services
D.

spending by households, government, firms, and foreigners on final goods and services
E.

all spending and saving by households, firms, and governments

1 points

Question 9

If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?

A.

$10,000
B.

$500
C.

$50
D.

$5,000
E.

$9,524

1 points

Question 10

When real consumption expenditure is plotted against real disposable income the resulting relationship is

A.

very weak.
B.

virtually flat .
C.

positive and very close to linear.
D.

negative and very close to linear.

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.