ECMA06_Tutorial_3_Solution.doc

4 Pages
79 Views
Unlock Document

Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Summer

Description
ECMA06 Tutorial #3 Answer Key Question 1 Part (a) • The AE function: AE = C + I AE = [60 + 0.75Y] + [100 – 10(r – 0.05)] = [60 + 0.75Y] + [100 – 10(0.05 – 0.05)] AE = 160 + 0.75Y • Equilibrium output/income: In equilibrium, Y = AE: Y = 160 + 0.75Y 0.25Y = 160 Y* = 640 Part (b) Suppose that output is set accidentally at 600 (i.e., Y = 600): • The level of AE when Y = 600: AE = 160 + 0.75(600) = 610 Mechanism that brings output back to equilibrium: • Since Y = 600 & AE = 610, the economy is trying to purchase more output than is being produce; i.e., we have excess demand. • Prices are fixed (by assumption) at their current level, firms try to satisfy the excess demand by depleting their inventories that leaves inventories below their desired levels. • To replenish inventories to their desired levels, firms would increase their current level of output. • This pressure will continue until output increases to its equilibrium level of 640. If Y = 600, how will GDP be measured using the final products approach? • If Y = 600, C = 60 + 0.75(600) = 510 & I = 100 • In terms of GDP accounting, C = 510 & investment = 600 – 510 = 90. • Note: Investment = 90 because investment includes both I (= 100), which is intended investment, and changes in inventories, which is – 10 (90 – 100). Part (c) Suppose that output is set accidentally at 700 (i.e., Y = 700): • The level of AE when Y = 700: AE = 160 + 0.75(700) = 685 Mechanism that brings output back to equilibrium: • Since Y = 700 & AE = 685, the economy is producing more output than can be sold; i.e., we have excess supply. • Prices are fixed (by assumption) at their current level, firms find that their inventories pile up unexpectedly, as they are producing more than they are selling. ECMA06 Tutorial #3 Answer Key 1 • To lower inventories to their desired levels, firms would decrease their current level of output. • This pressure will continue until output decreases to its equilibrium level of 640. If Y = 600, how will GDP be measured using the final products approach? • If Y = 600, C = 60 + 0.75(700) = 585 & I = 100 • In terms of GDP accounting, C = 585 & investment = 700 – 585 = 115. • Note: Investment = 115 because investment includes both I (=100), which is intended investment, and changes in inventories, which is 15 (115 – 100). Part (d) dY • The multiplier, : dI In equilibrium: Y = AE = 60 + 0
More Less

Related notes for MGEA06H3

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit