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ECON 2400
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APEcon 2400 Summer 2012 Solution to Midterm Exam Version APart I Multiple Choice 1 D Gross InvestmentNew housesEquipment and plant investmentChange in inventories194025601604340 2 B NXEXIM14201480603 B YCIGNX Cconsumer nondurablesconsumer durableshouseholds spending on services 2380189026506920 I4340 as shown in 1 GGovernment consumptiongovernment investment25405403080 NX60 Y69204340308060142804 B The real GDP NOT the nominal GDP measures the total quantities of goods and services produced in the economy of the economy The GDP deflator measures the general price level of goods and services in the economy5 D Investment in National Accounts is physical investment NOT financial investment It includes all business purchases of goods machines factories etc and household purchases of new houses but NOT household purchases of stocks and bonds which are financial investment When net investment is positive physical capital stock in the next period has to be higher than in the previous period KKnet investment t1tt 6 C Private savings equals YTC which equals disposable income minus consumption 7 A When public savings is negative ie TG the government is running a budget deficit When public savings is negative the government will still be able to raise enough funds to finance its purchases via issuing government bonds0 will lead to 8 C In the classical model an increase in autonomous consumption C0MPCYT and Y and an increase in consumption spending in equilibrium as CC0T are unchanged with the change in C in the LR National savings SYCG will 0therefore decrease as C increases As IS in equilibrium investment spending also decreases 9 C In the classical model an increase in taxes T0 will lead to a decrease in MPCYT will also reduce but disposable income YT by the same amount CC0privateYTC will therefore reduce as only by MPC times the amount of tax increase Spublicthe reduction in YT is larger than the reduction in C STG will increase as T increases and G reduces10 C Following 9 national savings SYCG will increase as both C and G reduce The S schedule shifts right and I increases as r decreases to the new equilibrium
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