ECON 2313 Solution to exercise 2 Part 1 a = 700

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ECON 2313 Solution to exercise 2 Part 1 a = 700 b = C/YD = 850/1000 = 0.85 C = 700 + 0.85YD = 700 + [(0.85)(4666.66)] = $4,666.66 C = b YD = 0.85 YD YD = - T = - 40.  C = (0.85)(-40) = -34

Figure 1 C (billions) 4666.66 700 YD (billions) 4666.66

Part 2 The multiplier is given by: 1/(1-b) = 1/(1-0.75)=1/0.25 = 4 The aggregate expenditure function is given by: AE = 600 – [(.75)(400)] + .75Y + 600 + 700 – 50 = 1550 + 0.75Y Use the following formula to solve for equilibrium GDP (Y) Thus we have:

AE (billions) Figure 2 E 1550 450 6,200 Real GDP (billions) AE = 1550 + 0.75Y E 1550 450 6,200 Real GDP (billions)

4. First we compute the change in equilibrium GDP (Y) Note that: YD = Y = 200 Thus we have: C = b YD = (0.75)(200) = $150 5. AE = 1550 + 0.75Y. Now we compute AE when Y = $6,500 AE = 1550 + [(0.75)(6,500)] = $6425 Y > AE by 75; hence we have positive unplanned inventory investment equal to $75.

’  Increase in government expenditure, ceteris paribus Panel A AE (billions) AE2 ’ AE1  450 Y2 Y1 Real GDP (billions)

’  Decrease in interest rates, ceteris paribus Panel B AE (billions) 450 Y2 Y1 Real GDP (billions)

 ’ ’ Stock market crash, ceteris paribus Panel C AE (billions) AE1 450 Y0 Y1 Real GDP (billions)

 ’ Increase in net taxes, ceteris paribus Panel D AE (billions) AE1 450 Y0 Y1 Real GDP (billions)

’  Increase in exports, ceteris paribus Panel E AE (billions) AE2 450 Y2 Y1 Real GDP (billions)