Given the following data for a hypothetical closed economy:

1. Fill-in the table.

2. Determine the Breakeven for the economy.

3. Determine the equilibrium GDP for the economy.

4. Calculate the expenditure multiplier.

5. Now suppose that the potential GDP equals 440, by how much should the government purchases or tax change to reach the potential GDP.

6. Drive consumption or saving equations. (show your work)

Consider a closed economy income-expenditure model of the economy where the country begins in a long-run equilibrium. • Investment (I) and government spending (G) are fixed: I = 41.5, G = 26. • The income tax rate is t = 6.25%, so tax revenue equals T = tY . • The consumption function is C = 12 + 0.8Yd, where Yd = (1 − t)Y . For the calculations below, write your answers as either a fraction or to two decimal places. (a) Write down the aggregate expenditure (AE) function using the above values. What is the value of the AE function’s intercept term? What is the value of the AE function’s slope term? What is equilibrium output? (b) Plot the aggregate expenditure function on a chart, with output (Y ) on the horizontal axis, in increments of 100 from 0 to 600. (c) In equilibrium, what is the level of consumption? What is the level of private saving? (d) What is the value of tax revenue, T? What is the value of government savings (T G)? Is the government running a surplus or deficit? (e) Suppose that the government reduces expenditure by 9.75 to 16.25. Suppose that this results in lower interest rates so that investment increases by 0.375 to 41.875. Following these changes, what is the new equilibrium level of output? (f) At the new level of equilibrium output, what is the new level of tax revenue? What is the new level of government savings? Is the surplus/deficit larger or smaller than it was in question (d)? (g) Simple income-expenditure models keep both the price level and interest rates fixed. In question (e), the interest rate was allowed to change. Discuss how allowing the price level to vary also would have changed output and tax revenue in equilibrium.

A closed economy can be described by the long-run classical model:

Y = 2K^αL^1–α

C = 18500 + 0.75(Y – T) – 800r

I(r) = 11000 – 1200r

Note: r represents the real interest rate and is measured in percentage points (for example, if we find r = 10, then r is interpreted as being equal to 10%). Keep your answer to 4 decimal places if needed.

Assume that there are two factors of production, capital (K) and labour (L), and that they are both fully employed. For this economy the supply of capital and labour are 27000 and 64000 respectively; and one-third of output goes to capital owner. Initially, the government collects 6% of the economy’s (long-run) output as (income) taxes, and the size of the budget deficit is 540.

1. Compute the long-run equilibrium levels of consumption, investment and private savings. Also, find the long-run equilibrium real wage for labour.  
2. Suppose the newly elected government wants to set the equilibrium level of national savings to 9104 via a change in (income) taxes. Find the level of taxes that will achieve the goal. What happens to the level of private savings (i.e., does it change? By how much).  

Now, return to the initial long-run equilibrium as shown in part (a). Suppose there is a downward adjustment in the stock market. As a result, autonomous consumption falls by 10%.

3. Why does autonomous consumption fall when there is a downward adjustment in the stock market? Explain in words
4. Find the new long-run equilibrium levels of consumption and private savings.  
5. Use the diagram for the loanable funds market to show your findings in parts (a) and (d). Be sure to clearly identify the equilibrium to each part of the question in your diagrams. No written explanation is needed.  

From the same Texas Department of Insurance data on closed claims for medical malpractice liability insurance referred to in Problem 1, we can estimate the number of claims in each year of injury that will be closed in the next 16 years. We obtain the following data. Here the estimated dollars per claim for each year have been adjusted to 2007 dollars to account for inflation, so the values are all compatible. Texas was said to have had a “medical malpractice liability crisis” starting in about 1998 and continuing until the legislature passed tort reforms effective in September 2003, which put caps on certain noneconomic damage awards. During this period premiums increased greatly and doctors left high-risk specialties such as emergency room service and delivering babies, and left high-risk geographical areas as well causing shortages in doctors in certain locations. The data from 1994 until 2001 is the following:

1. Calculate the mean or average number of claims per year for medical malpractice insurance in Texas over the four-year period 1994–1997.
2. Calculate the mean or average number of claims per year for medical malpractice insurance in Texas over the four-year period 1998–2001.
3. Calculate the mean or average dollar value per claim per year for medical malpractice insurance in Texas over the four-year period 1994–1997 (in 2009 dollars).
4. Calculate the mean or average dollar value per claim per year for medical malpractice insurance in Texas over the four-year period 1998–2001 (in 2009 dollars).
5. Looking at your results from (a) to (e), do you think there is any evidence to support the conclusion that costs were rising for insurers, justifying the rise in premiums?

7. Consider the following income-expenditure model of a closed economy. The aggregate consumption function is C = 100 +0.8(Y – T); taxes are T = 380; investment, I, is 300 and government expenditure, G, is 200.

( a)Calculate the multiplier, equilibrium income and the government budget surplus [6 marks]

(b)Now let taxes, T = 10 + 0.25Y. Recalculate the multiplier, equilibrium income and the government budget surplus. Try to explain any differences between your answers and your answers to part (a). [10 marks]

( c)Now we further extend the model and open the economy to trade. Let net exports be NX = 444 - 0.3Y. Keep the tax function as in (b). Recalculate the multiplier and equilibrium income and again explain any differences between your answers and those in part (b). [10 marks]

Given a closed, private economy where aggregate demand (AD) can be represented as AD = c0 + c1Y + I0 where c0 is autonomous private consumption, c1 is the marginal propensity to consume, I0 is autonomous business investment, and Y is national income.Central banks conduct monetary policy. Explain how through their conduct of monetary policy central banks can influence the level of economic activity in an economy.

Given the following data for a hypothetical closed economy:

1. Fill-in the table.

2. Determine the Breakeven for the economy.

3. Determine the equilibrium GDP for the economy.

4. Calculate the expenditure multiplier.

5. Now suppose that the potential GDP equals 440, by how much should the government purchases or tax change to reach the potential GDP.

6. saving equations. (show your work)