Answer all the questions and return to the Instructor at the Assigned due
date(To be uploaded in Black Board). Be sure to label and neatly present your
answer on the paper.
1 Problem Solving /30
for full credit, ensure to have full answers. Answers with incorrect answers but
correct reasoning will receive partial credit. Answers with correct answer but
incorrect or missing reasoning will receive no credit.
1. The following table shows alternative hypothetical economics and the relevant values for the marginal propensity to consume out of the disposable
income (MPC) the net tax rate t and marginal propensity to import ,m.
Economy MPC t m z Simple multiplier 1/1-z
A 0.75 0.2 0.15 – –
B 0.75 0.2 0.3 – –
C 0.75 0.4 0.3 – –
D 0.9 0.4 0.3 – –
(a) compute z and the simple multiplier for each economy considering
the question z = MP C(1 − t) − m
(b) Compare economies A and B. which economy has a larger multiplier
and why does the multiplier depend on m?
(c) Compare economies B and C. which economy has a larger multiplier
and why does the multiplier depend on t?
(d) Compare economies C and D. which economy has a larger multiplier
and why does the multiplier depend on MPC?
2. Suppose you are given the following information for an economy without
government spending, imports or exports. C is a desired consumption, I
is desired investment, and Y is income. C and I are given by:
C = 1400 + 0.8Y (1)
I = 400 (2)
(a) What is the equation for the Aggregated Expenditure (AE)?
(b) Applying the equilibrium condition that Y = AE determine the level
of equilibrium national income
(c) using the answer from b) determine the values for consumption, saving and investment when the economy is in equilibrium
3. The economy of Neverland has the following AD and AS schedules. Denote
YAD as the level of real GDP along the AD curve and YAS as the real GDP
level in the AS curve. GDP is as shawn in the table below from 2002 in
Billions of dollars
price level YAD YAS
90 1100 750
100 1000 825
110 900 900
120 800 975
130 700 1050
140 600 1125
(a) Plot AD and AS curves on a scale diagram
(b) what is the price level and GDP level at equilibrium?
(c) suppose the level of potential output in neverland shifted from $750
billion to $950 billion. Describe with the help of figure the transformations in AS and AD.explain the rule of inflation if any