Instructions:

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)

1

(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

(6 marks)

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