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ECON5002

Tutorial 2 (The Goods Market)

1. Suppose that the economy is characterised by the following behavioural equations:

C   =   160 + 0.6YD

I   =   150

G   =   150

T   =   100

(a) Solve for equilibrium GDP (Y).

(b) Solve for disposable income (YD).

(c) Solve for consumption spending (C).

2. For the economy in the above problem:

(a) Solve for equilibrium output.  Calculate total demand.  Is it equal to production?  Ex- plain.

(b) Assume that G is now equal to 110.   Solve for equilibrium output.   Calculate total demand. Is it equal to production? Explain.

(c) Assume that G is equal to 110, so output is given by your answer to (b).  Calculate private plus public saving. Is it equal to investment? Explain.

3. Suppose the economy is characterised by the following behavioural equations:

C   =   c0 + c1YD

YD     =   Y–T

I   =   b0 + b1Y

Government spending and taxes are constant.   Note that investment now increases with output.

(a) Solve for equilibrium output.

(b) What is the value of the multiplier?  How does the relation between investment and output affect the value of the multiplier? For the multiplier to be positive, what condition must satisfy? Explain your answers.

(c)  Suppose that the parameter b0 , sometimes called business confidence, increases.  How will equilibrium output be affected?  Will investment change by more or less than the change in b0? Why? What will happen to national saving?