# Denver ECON 2030 – Suppose that we have a closed economy

Question

ECON2030 INTERMEDIATE MACROECONOMICS

FALL-2016 ?TAKE-HOME EXAM-1

ASSIGNED ON 10/04/2016 ?DUE ON 10/10/2016

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INSTRUCTIONS : S HOW YOUR WORK! DO NOT W RITE DOWN THE FINAL RESULT

AND/OR A GENERAL STATEMENT ONLY! S HOW EV ERY STEP OF YOUR ANSWER AND

EXPLAIN YOUR CONCLUSION ! DO NOT ASSUME THAT I WILL FIGURE OUT HOW YOU

REACHED Y OUR CONCLUSION. DO NOT FORGET TO WRITE DOW N THE IDENTITIES

AND/OR EQUATIONS THAT ARE NECESSARY FOR SOLUTION. IF NECESSARY, W ORK

ON THE QUESTIONS IN A SCRAP PAPER FIRST AND THEN SUBMIT YOUR ORGANIZED,

CLEAR, AND FINAL (TYPED) ANSWERS! ________________________________________________________________________

(30 points) Suppose that we have a closed economy. Initially, our economy is at

equilibrium at point (E 0) as depicted in the following figure. Answer the following questions

based only on the information provided in each step and what you learned from Chapter 3

in your textbook.

Demand, Z & Production Y

(in trillions) Production, Y (slope=1) E1

Demand, ZZ =C+I+G E0 Y e=$13 Y f=$14.13 Income, Y (in trillions) (a) Suppose that the actual level of output ( ) is $13 trillion whereas the goal or the fullemployment level of national income (Y f) is $14.13 trillion. In addition, assume that = ?.

Now suppose that an economist calculated that $416 billion worth autonomous spending

can take the economy from its current level (i.e., $13 trillion) to the full-employment level of 1 output (Y f =$14.13 trillion). Based on this information, calculate the value of the multiplier

in this economy and explain its meaning in your own words. (Hint: Note that you do not have to

know the specific form of the functions at this stage. Based on equilibrium condition in the product market,

use the relationship between spending and national income through the multiplier).

(b) Suppose that consumption and tax functions have the following form: = 0 + 1 ( ?

), and = 0 + 1 . In addition, assume that = .? If average marginal tax rate is 25

percent, calculate the value of marginal propensity to consume and explain its meaning in

your own words. (Hint: Start from equilibrium condition in the product market and drive the mul tiplier).

(c) Now, suppose that the tax rate is set to 6.25 percent and the marginal propensity to

consume stays at the same level in part (c), calculate the value the multiplier and amount of

necessary spending to take the economy from its current level ($13 trillion) to the fullemployment level ( = $14.13 ). How would you explain the difference between the

figure you find here and the figure in part (a)?

(d) Finally, suppose we are at the initial, actual level of output, = $13trillion, and have

the following information: 0 = $1; 1 = 0.0625; 0 = $0.2; = $1.3 (in trillions). Based

on this information, find the level of government expenditures (G). (Hint: For the mpc use the

value you found in part (b)).

(e) Using the information in part (d), find the amount of private and public saving and show

that the sum is equal to private investment spending, and draw the equilibrium point in the

saving-investment graph. (Hint: Use the investment-saving identity and private saving function. Do not

forget to label the axis and important intersection points in the graph).

(f) Given the results in part (e), which one of the following economic policies would you

suggest to reach the full employment level: policies that encourage households to save more

or use of expansionary fiscal policy? Why?

Originally posted 2016-11-13 09:46:35. Republished by Blog Post Promoter