Econ 2123 Problem Set 2 Solution

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

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

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

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

1. .25.
2. .7.
3. 1.
4. 4.
5. none of the above

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

1. an increase in the marginal propensity to save
2. an increase in taxes
3. a reduction in the marginal propensity to consume
4. all of the above
5. none of the above

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

1. 100
2. 200
3. 250
4. 500
5. 1000

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

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

1. Which of the following about IS relation is NOT correct?

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

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

1. an increase in the interest rate increase
2. a reduction in the interest rate increase
3. a reduction in income
4. none of the above

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

1. a reduction in the interest rate
2. an increase in the interest rate
3. an open market sale of bonds by the central bank
4. an increase in income
5. none of the above

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

1. the price of bonds will tend increase.
2. the price of bonds will tend to fall.
3. production equals demand.
4. the goods market is also in equilibrium.
5. the supply of bonds also equals the demand for bonds.

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

1. the central bank purchases bonds and the interest rate increases.
2. the central bank purchases bonds and the interest rate decreases.
3. the central bank sells bonds and the interest rate increases.
4. 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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