J. Diskin, February 3, 2003
Problems Due: Wednesday
February 10th by 5 pm.
The following problems
require you to calculate the relationship between the forms of demand (C, I, G,
and NX), the leakages (S and T) and
national Y. You will need to show your
answers graphically as well as in equations
To begin, let:
Ca = 250;
c = .9; t = 0; T = 0;
Ip = 0; G0 =
0; NX = 0
1) Graph the Consumption and
Savings (induced and total) functions.
Label clearly and fully.
2) Calculate the equilibrium
level of Y based on the above information. Show on the graph from question
1. What is S and sY at equilibrium? What is the multiplier?
3) Now suppose that people
changed their behavior and now only consumed 80% of their income. Show how the Consumption and Savings
functions as well as national income, Y, respond to this new behavior. What is the new level of Y? [Until further
notice, assume c = .8] Note any
change in the multiplier.
4) Now suppose that new investment
enters the model so that Ip = 100.
What is the new level of equilibrium Y?
Show both the new Ep curve as well as the new Savings and
Induced saving functions. What is the
relationship between S and I at equilibrium?
What do we know about induced saving at equilibrium?
5) Now, lets assume that the
state implements an autonomous tax of T= 150.
Show any changes in the Ep and Savings functions and
calculate the new equilibrium Y. Is
there a change in the multiplier? If so, what is it now?
6) Now suppose that
Government spending increases from 0 to 150, i.e., G = 150. What is the new level of equilibrium
Y?
How has the level of Y
changed from #4 as a result of the increase in both autonomous T and G from
question 4? Explain this result.
7) Now suppose that the
government decides to eliminate its autonomous taxation and switch to a flat
rate percentage tax of 25%. In other
words, t = .2. Now, show graphically and
as an equation, the new level of equilibrium Y. Note any change in the multiplier.
8) Is the government running
a balanced budget or a deficit or surplus? How much? What is the relationship between induced leakages and autonomous
spending?
9) What is the level of C, I,
G, S and T at equilibrium Y? Do savings and leakages add up?
In addition, do the following
problems from the back of Chapter 3.
Question 6 and Problem 7.