PROBLEM SET NUMBER 1

CONSUMPTION C =200+.60*DPI C = 400+.75*DPI C = 500+.80*DPI

INVESTMENT I = 400 I = 800 I = 500

GOVERNMENT G = 600 G = 1200 G = 800

TRADE BALANCE X = -200 X = -400 X = 1000

TAXES T = 0 T = 0 T = 10 PCT

ANSWERS

GDP 2500 8000 10000

DISPOSABLE INCOME 2500 8000 9000

CONSUMER SPENDING 1700 6400 7700

SAVING 800 1600 1300

PARTIAL SOLUTION TO FIRST EXAMPLE

EQUILIBRIUM => GDP = C + I + G + X

GDP = 200 +.60 * DPI + 400 + 600 + -200

GDP = 1000 +.60 * DPI

NOTE THAT DPI = GDP - TAX

DPI = GDP - 0

DPI = GDP

GDP = 1000 +.60 * GDP

.40 * GDP = 1000

GDP = 1000/.40

GDP = 2500

MULTIPLIER EFFECT

MULTIPLIER CONCEPT

dSALES => dGDP => dDPI => dSALES

BE ABLE TO EXPLAIN THE SEQUENCE OF EVENTS

PROBLEM SET NUMBER 2

CONSUMPTION C=400+.75*DPI C= 400+.75*DPI C = 8,000 +.80*DPI

INVESTMENT I = 450 I = 400 I = 20,000

GOVERNMENT G = 200 G = 200 G = 5,000

TRADE BALANCE X = 500 X = 500 X = -6,000

TAXES T = 0 T = 20 PCT T = 20 PCT

ANSWERS

GDP 6200 3750 75,000

DISPOSABLE INCOME 6200 3000 60,000

CONSUMER SPENDING 5050 2650 56,000

SAVING 1150 350 4,000

QUESTIONS

1. FIND THE EQUILIBRIUM LEVEL OF OUTPUT.

2. AT EQUILIBRIUM, HOW MUCH DO CONSUMERS SPEND?

HOW MUCH DO THEY SAVE?

3. WHAT IS TAX REVENUE? WHAT IS THE FEDERAL DEFICIT?

4. IN THE LAST PROBLEM, IF A DECREASE IN BUSINESS CONFIDENCE

WOULD CAUSE INVESTMENT SPENDING TO FALL TO 15,000,

WHAT WOULD BE THE ANSWERS FOR THE ABOVE QUESTIONS?

5. IN EACH PROBLEM, IF INVESTMENT SPENDING ROSE BY TWO PERCENT,

WHAT WOULD BE THE ANSWERS FOR THE ABOVE QUESTIONS?

HOW DO THE ANSWERS TO (4) COMPARE TO THE ANSWERS IN (5)?

6. IN EACH PROBLEM, IF THE CONSTANT IN THE CONSUMPTION

FUNCTION ROSE BY 1000, WHAT WOULD BE THE ANSWERS FOR THE

ABOVE QUESTIONS? HOW DO THE ANSWERS TO (6) COMPARE TO

THE ANSWERS IN (5)?

7. SUPPOSE THAT OUTPUT WAS 400 ABOVE (OR BELOW) EQUILIBRIUM.

HOW AND WHY WOULD THE PRIVATE SECTOR RESPOND? WHAT WOULD

BE THE BEGINNING AND FINAL TOTALS FOR SALES? EXPLAIN THE

ADJUSTMENT PROCESS. FOCUS ON THE INVENTORY SIGNAL.

8. MOST GDP NUMBERS ARE HEADLINED IN THE NEWSPAPERS AS

PERCENTAGE CHANGES. WHAT COULD CAUSE A 5 PERCENT INCREASE

IN GDP IN EACH OF THE ABOVE CASES?

PROBLEM SET NUMBER 3

CASE 3.1

C = 650 + .75 DPI

I = 13000

G = 130

X = 6500

TAX = 10 PCT

ANSWER

GDP = 54080

CASE 3.2

C= 6776 + .70 DPI

I = 1694

G = 13552

X = ‑8470

TAX = 20 PCT

ANSWER

GDP = 30,800

CASE 3.3

C= 2800 + .80 DPI

I = 140

G = 6700

X = ‑40

TAX = 15 PCT

ANSWER

GDP = 30,000

FOR EACH CASE:

1. FIND THE EQUILIBRIUM OUTPUT.

2. AT EQUILIBRIUM, HOW MUCH DO CONSUMERS SPEND? WHAT IS TAX

REVENUE? WHAT IS THE FEDERAL DEFICIT?

3. IF INVESTMENT SPENDING ROSE BY 10% WHAT WOULD BE THE NEW ANSWERS FOR THE ABOVE QUESTIONS?

4. SUPPOSE OUTPUT WERE $1000 (A) BELOW OR (B) ABOVE

EQUILIBRIUM. HOW AND WHY WOULD THE PRIVATE SECTOR RESPOND?

WHAT WOULD BE THE INITIAL AND FINAL VALUES OF C, T. AND I?

5. SUPPOSE THAT THE GOVERNMENT WANTED TO (A) INCREASE OR (B)

REDUCE INCOME BY $1000. HOW COULD THIS BE DONE? GIVE AT

LEAST THREE OPTIONS, INCLUDE THE SPECIFIC NUMBERS.

6. HOW WOULD A CHANGE IN THE MARGINAL TAX RATE AFFECT THE

SYSTEM?

7. MOST GDP NUMBERS ARE HEADLINED IN THE NEWSPAPERS AS

PERCENTAGE CHANGES. WHAT COULD CAUSE A 5 PERCENT INCREASE

IN GDP IN EACH OF THE ABOVE CASES?

8. THERE ARE NO INTEREST RATES IN THE ABOVE MODELS. HOW WOULD

INCLUDING A ROLE FOR INTEREST RATES AFFECT YOUR ANSWERS?

WOULD THE CHANGES BE LARGER OR SMALLER? WHY?