1. The following table provides numerical information of a fictitious economy: C
ID: 1160597 • Letter: 1
Question
1. The following table provides numerical information of a fictitious economy:
Consumption function:
C = 2 +0.75(Y – T)- 0.05r
Investment:
I =3-0.3ri
Government expenditure:
G = 1.45
Net taxes:
T = 1.6
Financial friction:
f = 2
Net exports
NX = 1- 0.15r
Real interest rate for investment:
ri = r + f
Using the table above, and Y = 15, r = 3.8, find (round to 2 decimal places):
(a) NX = __________; I = __________; C = __________.
(b) The expenditure multiplier is __________.
(c) The numerical value of the slope of the IS curve is __________ (indicate positive (+) or negative (-)).
Consumption function:
C = 2 +0.75(Y – T)- 0.05r
Investment:
I =3-0.3ri
Government expenditure:
G = 1.45
Net taxes:
T = 1.6
Financial friction:
f = 2
Net exports
NX = 1- 0.15r
Real interest rate for investment:
ri = r + f
Explanation / Answer
a) NX = 1-0.15*r
substituting the value of r given as 3.3 in the above equation we get
NX=1-0.15*3.8=0.43
NX=0.43
I=3-0.3*ri where ri=r+f,
as per the given table r=3.8, f=2 this implies that ri=3.8+2=5.8
substituting value of ri=5.8 in the Investment equation we will get
I=3-0.3*5.8=1.26
I=1.26
C=2+0.75(Y-T)-0.05r
As per the values gien in the table above : Y=15 r=3.8 T=1.6
Substituting the values as above we get:
C=2+0.75(15-1.6)-0.05*3.8
=2+13.8-0.19=15.61
C=15.61
b) The expenditure multiplier is defined as 1/(1-MPC)
where MPC is the marginal propensity to consume and is calculated as the change in consumption induced by the change in Income.
MPC= slope of the consumption curve
As per the given consumption equation:
C=C = 2 +0.75(Y – T)- 0.05r
MPC=0.75
Multiplier=1/(1-0.75)=4
Multiplier =4
c) Slope of the IS curve is defined as the slop of the following curve as per the given problem :
I =3-0.3ri
substituting r=3.8 as per the given problem we get
I=3-0.3*3.8*i
I=3-1.14i
Numerical value of the slope of IS curve is -1.14
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