# Econ 2123 Problem Set 2 Solution

Essay by Marcus Leung • April 26, 2017 • Course Note • 2,352 Words (10 Pages) • 1,866 Views

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Econ 2123 Problem Set 2

Instructor: Wenwen Zhang

TA: Peter Tsui, Lawrence Ko

Lecture: L3, L4

Due date & Homework Submission Location: Before 10/14 Tue 5:30p.m. Homework Collection Box on the LSK 6th floor (Next to Econ Department, near lifts 3-4)

Name: _________________________________

Student ID: _____________________________

Lecture: ________________________________

Multiple Choices

- Which of the following would NOT be considered part of fixed investment spending (I)?

- Toyota buys a new robot for its automobile assembly line.
- Apple computer builds a new factory.
- Exxon increases its inventories of unsold gasoline.
- An accountant buys a newly built home for herself and her family.
- all of the above

- Suppose the consumption equation is represented by the following: C = 250 + .75YD. Given this information, the marginal propensity to save is

- .25.
- .7.
- 1.
- 4.
- none of the above

- Which of the following events will cause a reduction in equilibrium output?

- an increase in the marginal propensity to save
- an increase in taxes
- a reduction in the marginal propensity to consume
- all of the above
- none of the above

- If C = 2000 + .9YD, what increase in government spending must occur for equilibrium output to increase by 1000?

- 100
- 200
- 250
- 500
- 1000

- Based on our understanding of the model presented in Chapter 3, we know that an increase in c1 (where C = c0 + c1YD) will cause

- the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a smaller effect on output.
- the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output.
- the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output.
- the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger effect on output.

- Which of the following about IS relation is NOT correct?

- It is the relation between interest rate and savings.
- It is the equilibrium condition for the goods market.
- It stands for "Investment equals saving."
- It shows what firms want to invest must be equal to what people and the government want to save.

- Which of the following will cause an increase in the amount of money that one wishes to hold?

- an increase in the interest rate increase
- a reduction in the interest rate increase
- a reduction in income
- none of the above

- The money demand curve will shift to the left when which of the following occurs?

- a reduction in the interest rate
- an increase in the interest rate
- an open market sale of bonds by the central bank
- an increase in income
- none of the above

- At the current interest rate, suppose the supply of money is less than the demand for money. Given this information, we know that

- the price of bonds will tend increase.
- the price of bonds will tend to fall.
- production equals demand.
- the goods market is also in equilibrium.
- the supply of bonds also equals the demand for bonds.

- Which of the following generally occurs when a central bank pursues expansionary monetary policy?

- the central bank purchases bonds and the interest rate increases.
- the central bank purchases bonds and the interest rate decreases.
- the central bank sells bonds and the interest rate increases.
- the central bank sells bonds and the interest rate decreases.

Short Questions

1. Suppose that the economy is characterized by the following behavioral equations:

[pic 1]

[pic 2]

[pic 3]

[pic 4]

(a) Solve for the equilibrium output. Compute total demand. Is it equal to production? Explain.

Y=160+0.6(Y-100)+150+150

Y=1000

Equilibrium output is 1000.

Total demand=C+I+G=700+150+150=1000. Total demand equals production. We used this equilibrium condition to solve for output.

(b) Solve for disposable income.

YD=Y-T=1000-100=900

(c) Solve for consumption spending.

C=160+0.6(900)=700

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

Output falls by (40 times the multiplier) = 40/(1-.6)=100. So, equilibrium output is now 900.

Total demand=C+I+G=160+0.6(800)+150+110=900. Again, total demand equals production.

(e) Assume that G is equal to 110, so output is given by your answer to (d). Compute private plus public saving. Is the sum of private and public saving equal to investment? Explain.

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