MGEC61H3 Chapter 16: Chapter 16 Notes

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purpleantelope226

19 Dec 2010

School

UTSC

Department

Economics for Management Studies

Course

MGEC61H3

Professor

Iris Au

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Document Summary

Chapter 16: output and the exchange rate in the short run. Determinants of aggregate demand (ad) in an open economy: there are 4 sources of ad in an open economy, consumption (c) c is determined by disposable income, y t. C = c(y t) = autonomous c + mpc (y t) Investment (i) i is determined autonomously: government spending (g) g is determined autonomously, net export/ca ca is determined by (y t) and q. Ca = ca(y t, q) = autonomous ca mpim (y t) + ca1 q. How output is determine in the short run. 1 (cid:247) (cid:247) (cid:246) (cid:231) (cid:231) (cid:230) (cid:222: output market equilibrium is given by ad = as = output (y). In the short run, p are p* are held fixed. Output market equilibrium in the short run: the dd schedule: the dd schedule: it shows the relationship between output and the exchange rate for which the output market is in short-run equilibrium.

Related Questions

C=2000+0.5(Y-T)
I=1500
G=2500
NX=200
T=2000

a) Determine equation for aggregate planned expenditure in thiseconomy.
b) Determine level of autonomous expenditure in this economy.
c) Determine the multiplier in this economy.
d) determine the short run equilibrium output in this economy.

13. Solve the equilibrium output equation that shows the multiplier, using general notations given above.

14. What is the multiplier in the above equation? Does the economy respond more to changes in autonomous spending when t₁ is 0 or when t₁ is positive? Explain.

15. Why is this marginal tax regime called an automatic stabilizer?

Part III: Aggregate demand and equilibrium output determination in an open economy model.

16. Consider the following behavioral equations for an economy that engages in international trade. Derive the equation to show the equilibrium output with the multiplier.

redrhinoceros604

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

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MGEC61H3 Chapter 16: Chapter 16 Notes

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