ECO 203
PROBLEM SET 5

 
Consider the following model of an economy and answer questions 1-5.
 
 (1) Y = C + I + G + X - M
 (2) C = 80 + 0.6DI
 (3) I = 35
 (4) G = 30
 (5) T = 25
 (6) X = 10
 (7) M = 20
 
1. What is equilibrium GDP?
 
 
 
 
 
 
2. What is consumption in equilibrium?
 
 
 
 
 
 
3. What is MPC & MPS respectively?
 
 
 
 
 
 
 
4. What is the multiplier?
 
 
 
 
 
5. If taxes were increased to $50, what would be the effect on Y?
 
 
 
 
 
Questions 6-9 assume equilibrium income found in question 1.
 
6. Suppose full employment Y is $400, by how much would we have to change taxes in order to bring about this new equilibrium level?
 
 
 
 
 
 
7. Suppose full employment Y is $400, by how much would we have to change government spending in order to bring about this new equilibrium level?
 
 
 
 
 
 
8. If taxes were cut to $10, what would be the effect on Y?
 
 
 
 
 
 
 
9. Given a tax increase of $50 and government spending was increased by $50, what would be the effect on Y?
 
 
 
 
 
 
 
 
10. If Sayeed's disposable income increases from $1200 to $1700 and his level of savings increases from minus $100 to
 a plus $100, it could be concluded that:
 
 
 
 
 
 
Consider the following table and answer questions 11-12.
 
Year Real GDP C I  X - M Potential GDP
 
 1 1150 700 250 200 1200
 2 1400 850 200 250 1300
 3 1400 900 100 400 1400
 4 1400 1000 200 250 1500
 5 1700 1200 300 200 1600
 
11. In what year is this economy in equilibrium and experiencing an expansionary gap?
 
 
 
 
 
 
 
12. In what year is this economy experiencing an unplanned inventory accumulation?
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12. Given the above graph, suppose potential GDP is equal to 300, there exists: