Economics
102 Student
Name:
Spring
2000 ID#:
Homework
#4 T.A.
Name:
Due
4/10/00 Sec.
Code:
Note: If asked to graph please use 1/4" graph paper. Label this paper with your name, id#, T.A.
name, and the number of your discussion section. If you need additional paper label it similarly. All homework paper should be stapled
together. There will be no stapler at
the large lecture hall. Please xerox
your homework so that you can compare your answers to the answer sheet.
1.
(12
points) Consider the following Keynesian model:
C=0.9*DI
where DI = Y - T
I=20
G=G0
T=T0
(where
G and T are constant and autonomously given in this economy)
(a) (3
points) When there is no government (i.e. T=0 and G=0), what is the equilibrium
level of Y (i.e., GDP)?
(b) (3
points) Suppose a government is established, and this government thinks that
the level of effective demand is too low. If this government sets G=15, without
raising taxes, by how much is it able to increase GDP? What is the government
expenditure multiplier?
(c) (3 points) Now suppose that, in order
to finance its expenditures, the government decides to set T=G=15. (This would
be an example of a balanced budget situation.)
By how much does GDP go down? What is the tax expenditure multiplier?
(d) (3 points) In general, by how much
does output change when both G and T are increased by the same amount? (Assume that taxes and government are
independent of income.) Does this mean
that fiscal policy is ineffective?
2. (5 points) Consider the following Keynesian model:
C=10+0.8*DI (where disposable income DI=Y -T)
I=20 (assume investment is constant and autonomously given)
G=15 (assume government spending is constant and autonomously given)
T=T0+t*Y, where T0=10, t=0.5. Please round numbers to two decimals.
a).
(2 points) What is the equilibrium level of Y (i.e., GDP)?
b).
(2 points) Suppose that we change T0 from 10 to 15 (i.e now
T=15+0.5Y instead of T=10+0.5Y). What will be the new equilibrium level ofY?
c).
(1 point) What is the tax expenditure multiplier?
3.
(9
points) Consider the following Keynesian model.
C=
100+0.8*DI (as always, DI=Y - T)
T=
-25+0.25*Y
I=
100 and G = 100
a).
(3 points) What is the equilibrium level of output Y?
b).
(2 point) What is the equilibrium level of consumption?
c).
(2 point) What is the equilibrium level of taxes?
d).
(2 point) What is the equilibrium level of saving?
4.
(6
points) Consider the Classical Model
and the loanable funds market. Suppose that government spending is G=2.5 $
trillion and taxes are T=2 $ trillion. Assume that we have the following
equation expressing the relationship between planned investment I and the
interest rate r:
r = 13 – 5*I
The equation expressing the relationship between
saving S and the interest rate r is
given by
r = -2.4 + 4*S
Note that the interest rate is expressed in the equation as a percent (e.g., 5% would appear in the equation as 5) and that I and S are expressed in trillions of dollars. Also note that both equations are written in slope-intercept form where the interest rate is on the vertical axis: this facilitates graphing the two equations. Please round all answers to 2 decimals.
a).
(2 points) Graph the supply and demand curves for the loanable funds market.
b).
(3 points) What is the equilibrium level of savings and equilibrium level of
the interest rate?
c).
(1 point) What is the size of leakages and injections in equilibrium? (Assume
this is a closed economy and therefore (X – M) equals zero.)
5.
(8
points) Consider the Classical Model.
The labor supply curve is
Ws = (1/40)*L
And
the labor demand curve is
Wd = 20 – (1/10)*L
Where
W is the wage per hour in dollars and L is the number of workers hired (in
millions of workers). Furthermore, the aggregate production function is
Y =
Here
Y or GDP is measured in trillions of $. Please round all answers to 2 decimals.
a).
(2 points) What is the equilibrium wage and employment?
b).
(2 points) What is the equilibrium level of GDP?
c).
(2 points) What is the productivity of workers at the equilibrium level of GDP?
d).
(2 points) Suppose that labor supply shifts right. The new equilibrium level of
employment becomes L=200. What is the productivity of workers at this new level
of L?