MGEB06H3 Chapter Notes - Chapter 3: Money Supply, Consumption Function, Production Function

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mauveserval732

13 Oct 2013

School

UTSC

Department

Economics for Management Studies

Course

MGEB06H3

Professor

Jack Parkinson

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Document Summary

Last time - the real economy in lr equilibrium: Suppose a country"s aggregate production function is given by and the country has 400 units of capital (k) and 100 workers (l). The consumption function is given by budget deficit of 50. Aggregate real investment in the economy is given by the equation. Note: r is measured in percentage points (so if r = 2 this means it is 2 per cent). and taxes are 20% of income. 2/1: the lr equilibrium levels output is. = 2,000: the lr equilibrium level of consumption is: T = 0. 20y = 400 (y t) = 1,600. C = 100 + 0. 80(1600) = 100 + 1280 = 1,380: lr equilibrium saving. = 220 50 = 170: lr equilibrium in the loanable funds market. 10r* = (200 170) = 30 r* = (30/10) = 3 (per cent) I = 200 10(3) = 200 30 = 170.

Related Questions

10.

The long-run aggregate supply curve (LRAS) is Y = Yf, which depends on the amounts of resources and the level of technology innovation. If a country has more resources and better technology, which of the following is true?

		A. The LRAS curve will shift to the right.
		B. The SRAS will shift to the right.
		C. The SRAS will shift to the left.
		D. Only A and B.
		E. Only A and C.

11.

Suppose the wage rates of workers are based on the expected price level. If there is an unexpected increase in AD, it will cause the actual price level to increase. Then workers should raise their expected price level and negotiate a higher wage rate. Then which of the following is most likely to be true when the expected price increases?

		A. The SRAS curve will shift rightward.
		B. The SRAS curve will shift leftward.
		C. The LRAS curve will shift leftward.
		D. Only A and C.
		E. Only B and C.

12.

Suppose the economy is in the long-run equilibrium, i.e., Y = Yf, and there is an unexpected decrease in AD. Assume that Yf is fixed, then which of the following is most likely to be true?

		A. The SRAS curve will shift to the right toward the new long-run equilibrium.
		B. The SRAS curve will shift to the left toward the new long-run equilibrium.
		C. In the new long-run equilibrium, price level will be higher.
		D. Only A and C.
		E. Only B and C.

13.

The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself?

		A. Price increases.
		B. Real GDP decreases.
		C. Unemployment rate falls.
		D. Only A and B.
		E. Only B and C.

14.

From the Keynesians, Y = C + I + G + NX can be transformed into a theoretical model. In particular, assume that the consumption C = A + mpc (Y-T), where A is a constant, mpc is the marginal propensity to consume, Y is national income and T is income taxes. Suppose in the goods market equilibrium, aggregate expenditure = national income such that the two Y's will be the same from Y = A + mpc (Y-T) + I + G+ NX. . Suppose C = 400 + 0.75(Y â T). G = 100, I = 100, T = 100, and NX = 150, what is the Y in the goods market equilibrium? (All of the variables are in terms of million dollars)

$ million
Please enter a whole number, with no decimal point.

15.

Continue to assume that C = 400 + 0.75 (Y - 100), I = 100, and NX = 150. But the government now increases spending from 100 to 200, how much is the new Y in the goods market equilibrium?

$ million
Please enter a whole number, with no decimal point.

16.

Continue to assume that C = 400 + 0.75 (Y - 100). Then which of the following is true?

		A. The government spending multiplier = 4.
		B. The tax multiplier = 3.
		C. If the government increases spending by $50 million, and at the same time increases taxes by $50 milion to balance the budget, AD will shift to the right by $50 million.
		D. Only A and C.
		E. Only B and C.

17.

Suppose the federal government needs to balance the budget, which means that when the government spending increases, taxes must increase equally. In this case, government spending multiplier is called the balanced-budget multiplier, defined as the increase in real GDP/increase in government spending. By following the example from the previous question, how mcuh is the balanced-budget multiplier?

Please enter a whole number, with no decimal point.

pearseal539

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

What is the equilibrium income?

Y* = aggregate demand at the equilibrium level. (Consumption + investment)

Consumption function = autonomous consumption + mpc * Y.

C=30 + .9Y

AD = 30 + .9Y + 20 = 50 + .9Y

Y= 50 + .9Y.1Y = 50

Y = $500 is the equilibrium level of income.

What is the value of saving at equilibrium?

Savings = income - consumption at the equilibrium level of Y=500,

Consumption = 30 +.9 * 500 = $480

Savings = 500 - 480= 20

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

Since planned investment = $20 which is equal to savings calculated, the saving investment identity holds true at equilibrium income.

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

If Government expenditures = $30, Y = C + I + G

Y = 1/1-.09 * (30+20+30) Y = 800

b. Calculate the total value of consumption at equilibrium.

C = 30 + .9(800) = 750

c. Calculate the total value of saving at equilibrium.

Savings = I - C = 800 - 750 = 50

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

What is the new value of equilibrium income?

Y = 1/1-.9 (30-.9(30) +20+30) = 530

What is the value of the autonomous tax multiplier?

-.09/.01 = -9

c. What is the value of autonomous spending multiplier?

1/.1 = 10

ochrewildebeest111

Suppose the initial conditions of the economy are characterized by the following equations in a standard font. We then shock the economy as shown in the italics font.

1) C = a₀ + a₁ (Y-T) + a₂ (WSM) + a₃ (WRE) + a₄ (CC) +a₅ (r)

1^') C = a₀ + a₁ (Y-200) + a₂ (10,000) + a₃ (15,000) + a₄ (120) +a₅ (4)

1'') C = a₀ + a₁ (Y-200) + a₂ (12,000) + a₃ (15,000) + a₄ (160) +a₅ (4)

2) I = b₀ + b₁AS + b₂CF + b₃ (r)

2') I = b₀ + b₁(140) + b₂(1,500) + b₃ (4)

2'') I = b₀ + b₁(140) + b₂(1,500) + b₃ (4)

3) G = G

3') G = 200

4) X-M = X-M

4') X-M = -200

4'') X-M = -400

5) AE = C + I + G + X-M

Where: a₀ = 50 a₁ = .60 a₂ = .05 a₃ = .10 a₄ = .5 a₅ = -400 b₀ = 100 b₁ = .5 b₂ = .2 b₃ = -50

Use the initial Conditions above to get expressions for the Consumption Function, Investment and the AE equation.

A) Complete the consumption function: C = ________+________Y

B) What is the value of Investment: I = _________

C) Fill in the intercept and slope values to correctly complete the AE equation:

AE = ________+________Y

D) The value of equilibrium output (Y) = _________

E) The value of equilibrium consumption (C) = ________

We now incur shocks ot the economy as provided in the italics font. Use these new conditions to get expressions for the Consumption Function, Investment and the AE equation.

F) Complete the new consumption function C = _______+______Y

G) What is trhe new value of Invesment: I = ________

H) Fill in th eintercept and slope values to correctly complete the new AE equation:

AE = _______+________Y

I) The new value of equilibrium output (Y) = ______

J) The new value of equilibrium consumption (C) = _______

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MGEB06H3 Chapter Notes - Chapter 3: Money Supply, Consumption Function, Production Function

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