Assignment Solution Essay

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Pages: 7

ECON112 Macroeconomics Problem Set 1 *Solution* By Yao Amber Li Fall 2010 (Instructor: Li, Yao; TA: Fok Pik Lin, Astor)

40 marks total

Part I: True/False/Uncertain Please justify your answer with a short argument. (10 marks, 2 marks each) One mark is for correct judgment. One mark is for correct argument. 1. GDP is the value of all goods and services produced in the economy during a given period. False.

GDP = Value of * FINAL* goods & services produced in the economy during a given period.

2. When disposable income equals zero, consumption equals zero. False. When disposable income equals
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c 1=0.6 (b) What is the value of marginal propensity to save (MPS)? 1-0.6=0.4 (c) Find the multiplier and autonomous spending. Multiplier = 1/(1-c1) = 1/(1-0.6)=1/0.4= 2.5 Autonomous spending = c0 + I + G -c1 T = 160+150+150 - 0.6*100=400 (d) Solve for private saving and public saving. Private saving: S = YD - C = 900 - (160+0.6*900) = 200 PUBLIC saving: T-G = 100-150= -50 3, Question 3 in Chapter 3 (2 marks each)

a. Equilibrium output is 1000. Total demand=C+I+G=700+150+150=1000. Total demand equals production. We used this equilibrium condition to solve for output. b. Output falls by (40 times the multiplier) = 40/(1-.6)=100. So, equilibrium output is now 900. Total demand=C+I+G=160+0.6(800)+150+110=900. Again, total demand equals production. c. Private saving=Y-C-T=900-160-0.6(800)-100=160. Public saving =T-G= -10. National saving equals private plus public saving, or 150. National saving equals investment. This statement is mathematically equivalent to the equilibrium condition, total demand equals production. In other words, there is an alternative (and equivalent) equilibrium condition: national saving equals investment.

Version 2: (5th edition) C = 180+0.8 YD I = 160 G = 160 T = 120 1, Question 2 in Chapter 3 (a) equilibrium GDP (Y) = 180+0.8(Y-120)+160+160

Y=2020 (b) YD=Y-T=2020-120=1900 (c) C=180+0.8(1900)=1700 2,
(a) What is the value of marginal propensity to consume (MPC)? c 1=0.8 (b) What is the value of marginal