Macroeconomics and Equilibrium Level
PROBLEM SET 3
Problems for Chapter 3
1. Suppose the consumption function in the U.S. is represented by the following equation:
C = 200 + .5 YD, where YD = Y – T and T = 200.
a. What is the level of consumption in this economy if YD = 0? Briefly explain how individuals “pay for” this consumption when YD = 0.
b. Given the above parameters, calculate the level of consumption if Y = 1200. Suppose Y increases to 1300. What happens to the level of YD as Y increases to 1300 (i.e. calculate the change in YD)? What happens to the level of consumption when Y rises to 1300 (i.e. calculate the change in consumption)? Using the change in YD and the change in consumption you calculated, what is the marginal propensity to consume (MPC) for this economy? Is this the same as the parameter of the consumption function that represents the marginal propensity to consume?
c. Write out the saving function for this economy. (HINT: S = YD – C. Substitute for C from the information above and simplify the right side of the equation). What is the level of saving when YD = 0? Explain how and why this occurs. What is the marginal propensity to save for this economy? How do you know?
2. Suppose the U.S. economy is represented by the following equations:
Z = C + I + G C = 400 + .5 YD T = 400 I = 200
YD = Y – T G = 600
a. What is the marginal propensity to consume for this economy? What is the marginal propensity to save?
b. Write out the equation that indicates how aggregate demand (Z) is a function of income (Y) and the remaining autonomous expenditures. What will be the level of aggregate demand if Y = 0? What does this level of demand represent? Furthermore, given you equation, what will happen to the level of aggregate demand (Z) as Y increases by $1? What does this number represent?
c. Based on your answer in part (b), calculate the level of demand (Z) for the following levels of income: Y = 1600, Y = 1800, Y = 2200, and Y = 2400. Now compare the level
Problems for Chapter 3
1. Suppose the consumption function in the U.S. is represented by the following equation:
C = 200 + .5 YD, where YD = Y – T and T = 200.
a. What is the level of consumption in this economy if YD = 0? Briefly explain how individuals “pay for” this consumption when YD = 0.
b. Given the above parameters, calculate the level of consumption if Y = 1200. Suppose Y increases to 1300. What happens to the level of YD as Y increases to 1300 (i.e. calculate the change in YD)? What happens to the level of consumption when Y rises to 1300 (i.e. calculate the change in consumption)? Using the change in YD and the change in consumption you calculated, what is the marginal propensity to consume (MPC) for this economy? Is this the same as the parameter of the consumption function that represents the marginal propensity to consume?
c. Write out the saving function for this economy. (HINT: S = YD – C. Substitute for C from the information above and simplify the right side of the equation). What is the level of saving when YD = 0? Explain how and why this occurs. What is the marginal propensity to save for this economy? How do you know?
2. Suppose the U.S. economy is represented by the following equations:
Z = C + I + G C = 400 + .5 YD T = 400 I = 200
YD = Y – T G = 600
a. What is the marginal propensity to consume for this economy? What is the marginal propensity to save?
b. Write out the equation that indicates how aggregate demand (Z) is a function of income (Y) and the remaining autonomous expenditures. What will be the level of aggregate demand if Y = 0? What does this level of demand represent? Furthermore, given you equation, what will happen to the level of aggregate demand (Z) as Y increases by $1? What does this number represent?
c. Based on your answer in part (b), calculate the level of demand (Z) for the following levels of income: Y = 1600, Y = 1800, Y = 2200, and Y = 2400. Now compare the level