Econ wk 2

Topics: Money supply, Macroeconomics, Marginal propensity to consume Pages: 5 (1048 words) Published: February 7, 2015
Karynn Ortiz Week 2 HW
Chapter 3.  Problem 2
Consider an economy in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the magical propensity to consume, planned investment, government purchases and goods and services, and net exports. Ca =1500-10r c=0.6 T=1800 Ip=2400-50r G=2000 NX=-200 a. Compute the value of the marginal propensity to save.

1-c = s 1 - 0.6= .04 Marginal propensity to save is .04

b. Compute the amount of autonomous planned spending Ap, given that the interest rate equals 3. Ca – cTa + Ip + G+ NX
1500 – 10(3)- 0.6(1800) + 2400 – 50(3) + 2000 + (-200) = 1500-30-1080+2400-150+2000-200=4440
The amount of autonomous planned spending is 4440

c. Compute the equilibrium level of income, given that the interest rate 3. Ap/s
4440/.4 = 11100
The equilibrium level of income is 11100

d. Suppose that autonomous consumption changes by 4 percent for any change in household wealth and that the decline in the housing market from 2006-09 and the drop in stock market from 2007-09 reduce household wealth by $3 trillion. Compute the decline in household wealth. .04(3) = .120 = 120

e. Calculate the new amount of autonomous planned spending Ap, and the new equilibrium level of income, given that the interest rate equals 3. 4440-120 = 4320
4320/.4 = 10800
The new equilibrium level of income is 10800

f. Using your answers to parts c-e, compute the value of the multiplier. New situation-old situation= change in income
Y/Ap=1/s
Y=(10800-11100)=-300
Ap=(4320-4440)=-120
-300/-120 = 1/.4 2.5=2.5

g. Fiscal and monetary policymakers can spend to the decline in household wealth by taking actions that restore income to its initial equilibrium level. Fiscal policymakers can increase government spending or tax cuts or do both. Monetary policymakers can reduce interest rates. Given the values of the multiplier, computer by how much:

a. Government spending must be increased in order to restore the initial equilibrium level of income, given no change in taxes or the interest rate. Initial equilibrium level of income is 11100

b. Taxes must be cut in order to restore the initial equilibrium level of income, given no change in government spending or the interest rate. Ap = Ca – cTa
120/(-.6) = -200
Government must reduce taxes by $200 billion to get to the equilibrium level of income of $11100.

c. Government spending and taxes must be increased in order to restore the initial equilibrium level of income, given no change in the government budget balance or the interest rate.

d. The interest rate must be reduced in order to restore the initial equilibrium level of income, given no change in government spending or taxes.

Chapter 4.  Problems 1

You are given the following equation for the real demand money; (M/P)d = .25Y-50r. a. Compute the demand for money for each of the following interest rates when income is equal to $11940, $12000, $12060, $12120 and $12180: R=4.4 r=4.7 r=5.0 r=5.3 r=5.6 r=5.9 r=6.2

1. .25(11940)-50(4.4)= 2985-220= 2765
.25(12000)-50(4.4)= 3000-220=2780
.25(12060)-50(4.4)= 3015-220=2795
.25(12120)-50(4.4)= 3030-220=2810
.25(12180)-50(4.4)= 3045-220=2825

.25(11940)-50(4.7)= 2985-235=2750
.25(12000)-50(4.7)= 3000-235=2765
.25(12060)-50(4.7)= 3015-235=2780
.25(12120)-50(4.7)= 3030-235=2795
.25(12180)-50(4.7)= 3045-235=2810

.25(11940)-50(5.0)= 2985-250=2735
.25(12000)-50(5.0)= 3000-250=2750
.25(12060)-50(5.0)= 3015-250=2765
.25(12120)-50(5.0)= 3030-250=2780
.25(12180)-50(5.0)= 3045-250=2795

.25(11940)-50(5.3)= 2985-265=2720
.25(12000)-50(5.3)= 3000-265=2735
.25(12060)-50(5.3)= 3015-265=2750
.25(12120)-50(5.3)= 3030-265=2765
.25(12180)-50(5.3)= 3045-265=2780...
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