Question

Aggregate Expenditure Practice Problem #1

Consider the following AE model:

C=.75Y_d+ 300   Y_d = Y – T     I=100   G=50   T=40   M=50 X=65

1. Find the following:

Y* =	MPC =	MPS =
Budget Deficit =	Trade Surplus =	Autonomous C =
At Y*, C =	At Y*, I =	At Y*, G =
At Y*, T =	At Y*, net exports =	At Y*, Savings =
Leakages =	Injections =

2. Using the ∆RGDP equation, compute the new Y* if G is decreased by 15.

3. Verify your computation in #2 above by substituting G = 35 in the full AE model, and show your work.

4. Assume G remains at its original level of 50. Using the ∆RGDP equation, compute the new Y* if T is increased by 15.

5. Why does the change in G in question #2 have a more powerful effect on the economy than the change in T in question #4?

Aggregate Expenditure Practice Problem #2

Consider the following AE model:

C=.80Y_d+ 200   Y_d = Y – T    I=125 G=200 T=150 M=100 X=50

1. Find the following:

Y* =	MPC =	MPS =
Budget Deficit =	Trade Surplus =	Autonomous C =
At Y*, C =	At Y*, I =	At Y*, G =
At Y*, T =	At Y*, net exports =	At Y*, Savings =
Leakages =	Injections =

2. Using the ∆RGDP equation, compute the new Y* if autonomous consumption is decreased by 50.

3. Assume that Y_FE = 2000. Compute the ∆G necessary to make Y* = Y_FE.

4. Assume that Y_FE = 2000. Compute the ∆T necessary to make Y* = Y_FE.

Answer 1