Given the following model: Y = C + I + G + (X - M) Question 1 Suppose that : Aut

Question

Given the following model: Y = C + I + G + (X - M) Question 1 Suppose that : Autonomous Consumption = $ 500 MPC = 0.75 T axes = $ 400 Investment = $ 500 G overnment Spending = $ 1200 Exports = $ 300 Imports = $ 500 Find the following:

A. Equilibrium income

B. Equilibrium consumption

C. E quilibrium saving

D. Write the savings function

E. Show that injections equal withdrawals

Question 2 Suppose that full employment GNP (FE Y) is = 4000

A. Explicitly find the nec essary cha nge in G to get the economy to full employment GDP.

B. Explicitly find the necessary change in Taxes to get the economy to full employment GDP.

Question 3 Given the position of the economy in question one and tha t full employment GDP = 4000 explain how the following monetary policies would get the economy to full employment GDP

A. Open market operations

B. Discount rate

C. Federal funds rate

D. Required reserve ratio

Explanation / Answer

Ans 1

a) Y= C+I+G +X-M

Y=500 + 0.75Yd + 500+1200+300-500= 2000 + 0.75(Y-T)= 2000+ 0.75Y- 300

0.25Y= 1700

Y = 6800 is equilibrium income

B) equilibrium consumption =500+ 0.75(Y-T) = 500+ 0.75( 6800-400)= 500+ 4800= 5300

C) equilibrium saving = -500+ 0.25(Y-T)= -500+ 0.25(6400)= 1100

D) saving function is given by

S= -Ca + (1-mpc)Yd = -500+ 0.25(Y-T)

E) withdrawals= S+T+M= 1100+ 400+ 500= 2000

Injections= I+G+X = 500+ 1200+300=2000

So withdrawals= injections

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