1) This document provides 4 problems from a macroeconomics tutorial relating to Blanchard chapter 3 on aggregate demand and aggregate supply. The problems cover topics like consumption functions, investment demand, equilibrium output, and the multiplier process.
2) Problem 1 has students draw aggregate demand schedules, calculate equilibrium output, and discuss disequilibriums. Problem 2 defines a short-run macro model and asks students to explain equilibrium, disequilibrium, and compute equilibrium values.
3) Problem 3 covers the "paradox of saving" where an increase in savings can decrease equilibrium income. It asks students to derive saving functions, show the effect of an increased MPS on equilibrium with diagrams, and consider how investment affects the
Carta Abierta al Presidente Obama: Apoye a la Sociedad Civil en CubaGustavo Cisneros
Gustavo Cisneros –Presidente de la Junta Directiva de Cisneros-, junto con otros 78 renombrados personajes del ámbito político, empresarial y destacados miembros de la comunidad cubano-americana, solicitaron al Presidente Barack Obama, trabajar con el Congreso de su país en un marco legal que permita avanzar en la normalización de las relaciones con Cuba.
Mayo, 2014
ANSWER SHEETIMPORTANT STUDENT PLEASE COMPLETE ALL INFORMATION B.docxrossskuddershamus
ANSWER SHEET
IMPORTANT: STUDENT PLEASE COMPLETE ALL INFORMATION BELOW BEFORE SUBMITTING BACK TO YOUR INSTRUCTOR/Assignment Folder.
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STUDENT NAME___Type Your Name Here___
DATE COMPLETED/SUBMITTED ___INSERT DATE_____
[To Student: All your answers should be entered on this Answer Sheet. Submit this Answer Sheet to your Assignment Folder when completed.]
Instructor: David Byres. Course: BIOL 101 Section: 6982
Due: This Answer sheet should be submitted to your Assignment Folder within 3 hours of downloading the Exam.
Latest deadline for submission: 11:59p.m. 7/26/2015
Multiple Choice (Answer 30 Questions)
Type in the letter that represents your best answer to the corresponding question from the original final exam document.
1. 16.
2. 17.
3. 18.
4. 19.
5. 20.
6. 21.
7. 22.
8. 23.
9. 24.
10. 25.
11. 26.
12. 27.
13. 28.
14. 29.
15. 30.
Short Answer (Answer 3 Questions)
Complete these answers in your own words. Follow instructions in the Final Examination document. Answer all questions according to the instructions. Number each question here according to its number in the Final Examination document provided by your instructor. Each answer should be between two paragraphs and half a page in length.
Essay (Answer 2 Questions)
Complete these answers in your own words. Follow instructions in the Final Examination document. Number each question here according to its number in the Final Examination document provided by your instructor. Each answer should be roughly one page in length.
103:
Intermediate
Macroeconomics
Homework
4
Due
on
23rd
July
2015
Topic
7a:
Income
and
Spending
Conceptual
questions:
1. We call the model of income determination developed in this chapter a Keynesian
one. What makes it Keynesian, as opposed to classical?
2. What is an autonomous variable? What components of aggregate demand have
we specified, in this chapter, as being autonomous?
3. Why do we call mechanisms such as proportional income taxes and the welfare
system automatic stabilizers? Choose one of these mechanisms and explain
carefully how and why it affects fluctuations in output.
4. Show analytically what happens to the budget surplus when government increases
its expenditures.
Technical Questions:
5. Here we investigate a particular example of the model studied in Sections 9-2 and
9-3 with no government. Suppose the consumption function is given by C = 100 +
.8Y, while investment is given by I = 50.
a. What is the equilibrium level of income in this case?
b..
Econ 3022 MacroeconomicsSpring 2020Final Exam - Due A.docxtidwellveronique
Econ 3022: Macroeconomics
Spring 2020
Final Exam - Due April 24th 11:59pm
1 Multiple Choice Questions (5 points each)
Question 1 What is Ricardian Equivalence?
(a) The economic hypothesis that agents’ decisions are una↵ected by the timing of taxation
and government spending
(b) The economic hypothesis that agents’ decisions are a↵ected by the timing of taxation
and government spending
(c) The economic hypothesis that taxation must be equal every period.
(d) The economic hypothesis that it is impossible to individually identify taxation today
and taxation tomorrow.
Question 2 Consider the consumer problem from the microeconomic foundations we dis-
cussed in class. Suppose the wage decreases. What do we expect to happen to house-
hold labor supply?
(a) Unclear
(b) Increase
(c) Decrease
(d) Stay constant
1
Question 3 Consider the consumer problem from the real intertemporal model. Which of
the following conditions must be satisfied at the solution?
(a) MRSl,c = w
(b) MRSc0,l0 =
1
w0
(c) MRSl,l0 =
w(1+r)
w0
(d) All of the above
Question 4 If total factor productivity tomorrow, z0, increases. What should happen to
investment?
(a) Unclear
(b) Increase
(c) Decrease
(d) Stay constant
Question 5 Consider the standard Solow model from class where the production function
is zF (K, N) = zK↵N1�↵. What is the golden rule savings rate?
(a) sgr = 1 � ↵
(b) sgr = ↵
(c) The savings rate that leads to a steady state with the highest level of income per capita
(d) The savings rate that leads to a steady state with the lowest level of income per capita
2
2 Economic Growth (20 points)
Consider the Solow Growth Model seen in class where the production function is Cobb-
Douglas and given by:
Y = zK↵ (N)
1�↵
where 0 < ↵ < 1 and z is a constant. Let s be the savings rate of this economy, so that
aggregate savings is just a constant fraction of aggregate output: S = sY . Let n be the rate
of population growth, so N
0
N
= 1 + n. Finally, let d be the depreciation rate, and assume the
law of motion for aggregate capital is given by:
K
0 = (1 � d) K + I
(a) (5 pts) Find an expression for the steady state level of capital per capita (k⇤) that only
depends on parameters of the model. Clearly show your work.
(b) (5 pts) Discuss how per capita variables (consumption and income) as well as aggregate
variables (consumption, capital stock, output, and savings) behave in steady state.
Now, suppose that we have a linear production function given by
Y = zK
where z is a constant. Let s be the savings rate of this economy, so that aggregate savings
is just a constant fraction of aggregate output: S = sY . Let n be the rate of population
growth, so N
0
N
= 1 + n. Finally, let d be the depreciation rate, and assume the law of motion
for aggregate capital is given by:
K
0 = (1 � d) K + I
(c) (5 pts) Find an expression for the level of per capita capital stock today as a function
of per capita capital stock tomorrow. Clea.
1. This question is on the application of the Binomial optionAbbyWhyte974
1. This question is on the application of the Binomial option
pricing model.
PKZ stock is currently trading at 100. Over three-months it will either
go up by 6% or down by 5%. Interest rates are zero.
a. [25 marks] Using a two period binomial model to construct a delta-
hedged portfolio, price a six month European call option on PKZ
stock with a strike price of £105.
b. [3 Marks] Using your answer from the first part, together with the
put-call parity, price a put option on the same stock with same
strike and expiry.
COMP0041 SEE NEXT PAGE
2
2. This question is on the Binomial method in the limit δt → 0.
[40 Marks] The binomial model for pricing options leads to the for-
mula
V (S,t) = e−rδt [qV (US,t + δt) + (1 − q) V (DS,t + δt)]
where
U = eσ
√
δt, D = e−σ
√
δt, q =
erδt −D
U −D
.
V (S,t) is the option value, t is the time, S is the spot price, σ is volatil-
ity and r is the risk-free rate.
By carefully expanding U,D,q as Taylor series in δt or
√
δt (as appro-
priate) and then expanding V (US,t + δt) and V (DS,t + δt) as Taylor
series in both their arguments, deduce that to O (δt) ,
∂V
∂t
+
1
2
σ2S2
∂2V
∂S2
+ rS
∂V
∂S
− rV = 0.
COMP0041 SEE NEXT PAGE
3
3. This question is on probability and Monte Carlo
a. Consider theprobabilitydensity function p (x) fora randomvariable
X given by
p (x) =
{
µ exp (−µx) x ≥ 0
0 x < 0
where µ (> 0) is a constant.
i. [15 Marks] Show that for this probability density function
E
[
eθX
]
=
(
1 −
θ
µ
)−1
Hint: You may assume µ > θ in obtaining this result.
ii. [20 Marks] By expanding
(
1 −
θ
µ
)−1
as a Taylor series, show
that
E [xn] =
n!
µn
, n = 0, 1, 2, ....
iii. [15 Marks] Hence calculate the skew and kurtosis for X.
COMP0041 CONTINUED ON NEXT PAGE
4
b. [32 Marks] An Exchange Option gives the holder the right to
exchange one asset for another. The discounted payoff for this
contract V is
V = e−rT max (S1 (T) −S2 (T) , 0) .
The option price is then given by θ = E [V ] where
Si (t) = Si (0) e
(r−12σ
2
i )t+σiφi
√
t
for i = 1, 2, and φi ∼ N (0, 1) with correlation coeffi cient ρ.
Youmayassumethatauniformrandomnumbergenerator isavail-
able. Use a Cholesky factorisation method to show(
φ1
φ2
)
=
(
1 0
ρ
√
1 −ρ2
)(
x1
x2
)
,
where
(
x1
x2
)
is a vector of independent N (0, 1) variables and
has the same distribution as
(
φ1
φ2
)
.
Give a Monte Carlo simulation algorithm that makes use of anti-
thetic variates for the estimation of θ.
COMP0041 SEE NEXT PAGE
5
4. This question is on finite differences
a. [30 Marks] Consider a forward difference operator, ∆, such that
∆V (S) = V (S + h) −V (S) , (4.1)
where h is an infinitessimal. By introducing the operators
D ≡
∂
∂S
; D2 ≡
∂2
∂S2
show that
∆ ≡ ehD −1 (4.2)
where 1 is the identity operator. Hint: start by doing a Taylor
expansion on V (S + h) .
By rearranging (4.2) show that
D =
1
h
(
∆ −
∆2
2
+
∆3
3
−
∆4
4
+ O
(
∆5
))
.
Hence obtain the second order approximation for
∂V
...
1. This question is on the application of the Binomial optionSantosConleyha
1. This question is on the application of the Binomial option
pricing model.
PKZ stock is currently trading at 100. Over three-months it will either
go up by 6% or down by 5%. Interest rates are zero.
a. [25 marks] Using a two period binomial model to construct a delta-
hedged portfolio, price a six month European call option on PKZ
stock with a strike price of £105.
b. [3 Marks] Using your answer from the first part, together with the
put-call parity, price a put option on the same stock with same
strike and expiry.
COMP0041 SEE NEXT PAGE
2
2. This question is on the Binomial method in the limit δt → 0.
[40 Marks] The binomial model for pricing options leads to the for-
mula
V (S,t) = e−rδt [qV (US,t + δt) + (1 − q) V (DS,t + δt)]
where
U = eσ
√
δt, D = e−σ
√
δt, q =
erδt −D
U −D
.
V (S,t) is the option value, t is the time, S is the spot price, σ is volatil-
ity and r is the risk-free rate.
By carefully expanding U,D,q as Taylor series in δt or
√
δt (as appro-
priate) and then expanding V (US,t + δt) and V (DS,t + δt) as Taylor
series in both their arguments, deduce that to O (δt) ,
∂V
∂t
+
1
2
σ2S2
∂2V
∂S2
+ rS
∂V
∂S
− rV = 0.
COMP0041 SEE NEXT PAGE
3
3. This question is on probability and Monte Carlo
a. Consider theprobabilitydensity function p (x) fora randomvariable
X given by
p (x) =
{
µ exp (−µx) x ≥ 0
0 x < 0
where µ (> 0) is a constant.
i. [15 Marks] Show that for this probability density function
E
[
eθX
]
=
(
1 −
θ
µ
)−1
Hint: You may assume µ > θ in obtaining this result.
ii. [20 Marks] By expanding
(
1 −
θ
µ
)−1
as a Taylor series, show
that
E [xn] =
n!
µn
, n = 0, 1, 2, ....
iii. [15 Marks] Hence calculate the skew and kurtosis for X.
COMP0041 CONTINUED ON NEXT PAGE
4
b. [32 Marks] An Exchange Option gives the holder the right to
exchange one asset for another. The discounted payoff for this
contract V is
V = e−rT max (S1 (T) −S2 (T) , 0) .
The option price is then given by θ = E [V ] where
Si (t) = Si (0) e
(r−12σ
2
i )t+σiφi
√
t
for i = 1, 2, and φi ∼ N (0, 1) with correlation coeffi cient ρ.
Youmayassumethatauniformrandomnumbergenerator isavail-
able. Use a Cholesky factorisation method to show(
φ1
φ2
)
=
(
1 0
ρ
√
1 −ρ2
)(
x1
x2
)
,
where
(
x1
x2
)
is a vector of independent N (0, 1) variables and
has the same distribution as
(
φ1
φ2
)
.
Give a Monte Carlo simulation algorithm that makes use of anti-
thetic variates for the estimation of θ.
COMP0041 SEE NEXT PAGE
5
4. This question is on finite differences
a. [30 Marks] Consider a forward difference operator, ∆, such that
∆V (S) = V (S + h) −V (S) , (4.1)
where h is an infinitessimal. By introducing the operators
D ≡
∂
∂S
; D2 ≡
∂2
∂S2
show that
∆ ≡ ehD −1 (4.2)
where 1 is the identity operator. Hint: start by doing a Taylor
expansion on V (S + h) .
By rearranging (4.2) show that
D =
1
h
(
∆ −
∆2
2
+
∆3
3
−
∆4
4
+ O
(
∆5
))
.
Hence obtain the second order approximation for
∂V
...
Chapter 1 57.What is the difference between recession and de.docxsleeperharwell
Chapter 1
57.
What is the difference between recession and depression in an economy? Provide an example of depression from the real world that has hit the global economy.
Use the following to answer question 58:
Answer: When there is a mild fall in the gross domestic product (GDP) of an economy over a period of time it leads to recession in the economy. If the intensity of the fall in GDP is severe over a period of time, then it turns into a depression. Recession is cyclic in nature; that is, it repeats itself over a period of time in an economy. A famous example of depression is that of the Great Depression of the 1930s that occurred in the United States and affected the global economy. Even the financial crisis of 2008-2009 in the United States was very much reminiscent of the Great Depression.
58.
Refer to the following graph and identify the years for which Country A and Country B experienced recession.
Country A experienced its recession during 2003 and its early recovery during 2004. Country B experienced its first recession during 2002 and its early recovery in 2003. Country B experienced a second recession in 2007.
59.
Why do we call macroeconomics an imperfect science? Explain.
The study of macroeconomics depends mainly upon the historical data on different economies. Macroeconomists analyze these data to explain changes occurring in different economic parameters (income, prices, unemployment, etc.) and formulate policies. Additionally, macroeconomic studies cannot be conducted in controlled experiments, as in biology or chemistry, for example. In this way, macroeconomists are similar to weather forecasters.
60.
Are the terms “market clearing” and “equilibrium” one and the same? Explain.
Yes, both terms represent the same notion: the balance between supply and demand. It is the balancing point at which everything that is produced gets sold and fulfills the entire demand. Thus, if all other things remain constant, then there is no tendency to change the quantity supplied and demanded at this point.
61.
Do you agree with the statement, “macroeconomics rests on the foundation of microeconomics”? Explain.
Macroeconomics involves studying the aggregate of economic variables related to individual decision making parameters, which are microeconomic (think of individuals' expenses, investments, etc.). That is to say, the total expenditure in an economy is the aggregate (sum) of all the expenditures done by all consumers in that economy, or the total investment done in an economy is the aggregate (sum) of all individual investments done by firms in that economy. This reflects that macroeconomic study rests on the foundation of microeconomics.
62.
Give two examples of macroeconomic variables and microeconomic variables.
The income of your father is a microeconomic variable, while the gross domestic product (GDP) of your country is a macroeconomic variable. The money your father saves in the bank is a microeconomic va.
:In this paper, we consider the equity premium puzzle under a general utility function. We derive that
the optimal strategy under a general utility function approximate the optimal strategy under the special utility
function. This result posed in the present paper can be regarded as a generalization of the work by Gong and
Zou [13]
ECON 301 Intermediate MacroSpring 2019 Problem Set #1Du.docxtidwellveronique
ECON 301: Intermediate Macro
Spring 2019 Problem Set #1
Due: Monday, April 22, 10:30 AM
Directions: Put the names of up to 3 group members at the top of this page.
Please clearly mark each of your answers to the multiple choice questions
in capital letters in the spaces provided below. Please mark your solutions
(preferably typed) to each of the short answer questions on separate sheets
of paper (with clean edges if using notebook paper) and staple or paper
clip your solutions to the multiple choice answer sheet. Hand it in (one per
group) on or before the due date during class time.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
SECTION 1: MULTIPLE CHOICE QUESTIONS
1. Based on your understanding of the aggregate expenditure model, we know with certainty
that an equal and simultaneous increase in G and T will cause:
(a) an increase in output
(b) no change in output
(c) a reduction in output
(d) an increase in investment
(e) a decrease in investment
For the following two questions, suppose an economy produces only milk and butter. As-
sume that all production is consumed in each year, and that price and quantity data are given
in the tables below.
Year 1
Good Quantity Price
Milk 500 $2
Butter 2000 $1
Year 2
Good Quantity Price
Milk 900 $3
Butter 3000 $2
2. (Refer to the above tables) Between Year 1 and Year 2, real GDP (based on Year 1 as a base
year) grew by
(a) 58.18%
(b) 158.18%
(c) 160%
(d) 60%
(e) 260%
3. (Refer to the above tables) Between Year 1 and Year 2, the GDP deflator (based on Year 1
as a base year) rose
(a) 81.25%
(b) 90%
(c) 190%
(d) 83.33
(e) 183.33%
ECON 301: Intermediate Macro Problem Set #1 1
4. Which of the following generally occurs when a central bank pursues expansionary monetary
policy?
(a) the central bank purchases bonds and the interest rate increases
(b) the central bank purchases bonds and the interest rate decreases
(c) the central bank sells bonds and the interest rate increases
(d) the central bank sells bonds and the interest rate decreases
(e) an increase in the reserve requirement ratio
5. The marginal propensity to consume represents
(a) the level of consumption that occurs if disposable income is zero.
(b) the ratio of total consumption to disposable income.
(c) total income minus total taxes.
(d) the change in output caused by a one-unit change in autonomous demand.
(e) the change in consumption caused by a one-unit change in disposable income.
6. Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15%
interest rate. Given this information, we know that the bond’s price must be approximately:
(a) $870
(b) $1150
(c) $850
(d) $950
(e) $985
7. Equilibrium in the goods market requires that
(a) production equals income.
(b) production equals demand.
(c) consumption equals saving.
(d) consumption equals income.
(e) government spending equals taxes minus transfers.
8. The LM curve shifts down when which of the following occurs.
Problem Set 4Due Tuesday, April 12ECON 434 Internati.docxsleeperharwell
Problem Set 4
Due: Tuesday, April 12
ECON 434: International Finance and Macroeconomics
Penn State: Spring, 2016
1. Government Budget Constraints. This problem looks at the feasibility constraints facing the
government and the sustainability of current-account balances. This will generalize some of the results
we obtained in class.
__ Consider an economy that lasts for N periods. In period t, the government purchases Gt dollars
worth of goods, and it collects Tt dollars worth of taxes. The government can also purchase B
g
t bonds
in period t; if it holds B
g
t bonds in period t, then it receives (1 + r)B
g
t bonds in period t + 1. (For
simplicity, assume that the interest rate r is constant.) If B
g
t < 0, then it means the government is in
debt.
(a) What is the government's period-t budget constraint? (Your answer should contain Gt, Tt, B
g
t ,
and r.)
(b) How do you compute the primary �scal de�cit in period t? How do you compute the secondary
�scal de�cit in period t?
(c) Combine the period budget constraints for t = 1, . . . ,N to show that:
B
g
0 +
N∑
t=1
Tt
(1 + r)
t
=
N∑
t=1
Gt
(1 + r)
t
+
B
g
N
(1 + r)
N
. (1)
(d) Suppose that N is a �xed, �nite number. What condition does B
g
N have to satisfy, and why?
(e) Individuals who pay taxes have �nite lives, but institutions, such as governments, can live a long
time, possibly forever. This leads to the possibility that a government could, in principle, keep
rolling over its debt, even as generations of citizens come and go.1 Mathematically, we model this
by letting N →∞. What condition does B
g
N
(1+r)N
have to satisfy as N →∞? Explain your answer
in words.
(f) Suppose that the government starts out in debt, with B
g
0 < 0. Is it possible for the government
to run primary de�cits forever? Why or why not?
(g) Now, suppose that the government starts out with positive assets B
g
0 > 0. We'll look at the case of
an in�nitely-lived government (N = ∞), and we'll assess whether it's possible for the government
to make purchases while never taxing its citizens (i.e., Tt = 0, for t = 1,2, . . .).
__ Consider the following plan. Before making purchases in period t, the government has
(1 + r)B
g
t−1 dollars at its disposal from the interest it earned on its previous period's assets.
The government decides to take a fraction δ of this money to spend on period-t government
purchases Gt; the remaining fraction 1−δ is used to buy more bonds.
i. Provide an expression for B
g
t in terms of B
g
t−1, and provide an expression for Gt in terms of
B
g
t−1. (Both expressions will depend on δ and r.)
ii. Provide an expression for B
g
t in terms of B
g
0 and t, and provide an expression for Gt in terms
of B
g
0 and t. (Both expressions will depend on δ and r.)
1For an example, see �The Case of the Undying Debt� by François Velde: https://www.chicagofed.org/publications/working-
papers/2009/wp-12.
1
iii. In each period t, does the government run a primary surplus or de�cit.
I am Ryan J. I am a Macroeconomics Homework Helper at economicshomeworkhelper.com/. I hold a PhD in M.S. Economics, University of Maine. I have been helping students with their homework for past 7 years. I solve assignments related to Macroeconomics Assignment.
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1Practice with simple calculations related to Fiscal Polic.docxeugeniadean34240
1
Practice with simple calculations related to Fiscal Policy:
Question 1: According to Paul Krugman, the complex multiplier for the United States is about equal to 2. The American Recovery and Reinvestment Act of 2009 earmarked $787B in deficit spending, of which $330.4B was spent in 2009. (Total government deficits for 2009 were $1251.7B.) The increase in nominal GDP from 2009 to 2010 was $541.2B (3.8%). If we assume that this growth resulted from the ARRA stimulus package, what was the implied multiplier associated with the stimulus package?
Question 2: Look at disposable income, personal consumption and personal savings. What was the personal savings rate in the United States in 2011? (Use savings/disposable income, i.e. Average Propensity to Save.)
Question 3: What proportion of GDP was our federal government sector in 2010? (Divide federal government spending by GDP.) Per dollar of government spending, how much government spending was financed by government debt (negative savings) in 2010 at the federal level? (Divide negative federal government savings by federal government expenditure.)
Question 41: One popularly reported statistic for national economies is the Debt/GDP ratio. Total US Federal Debt in 2010 was $13.562 Trillion. What was our Debt/GDP ratio in 2010?
Question 5: Refer to Graph Set #2, the first picture entitled “Eurostat News Release.” How does the EU compare in the size of its public sector? (What percentage of GDP is government spending?) Are its government deficits larger or smaller than those of the US as a percentage of GDP in 2009?
Question 6: Government stimulus can take the form of increased spending or reduced taxes, or both. It creates government debt in both cases, but that debt affects the larger economy by different pathways. Can you answer each the following questions in one short sentence?
· The government increases spending without increasing taxes, and a deficit is generated:
· Where does the money to finance the deficit come from?
· How does this affect affordable credit for Investment and Consumption?
· How does it affect National Incomes? Who is the government paying money to when they make an expenditure?
· The government decreases taxes without decreasing spending, and a deficit is generated:
· Where does the money to finance the deficit come from?
· How does this affect affordable credit for Investment and Consumption?
· How does it affect personal savings rates (if personal taxes are lower)? How does it affect business savings rates, i.e. retained earnings, if profits taxes are lowered? How does it affect the cost of borrowed funds for businesses?
Monte-Carlo Option Pricing
This exercise uses observation that an option price can be calculated as a discounted risk-neutral expectation.
Context
This observation suggests that we could value an option by sampling many thousands, say, of possible asset prices, at , calculating the payoffs, taking their expected value and discounting th.
1. Department of Economics Macroeconomics
BSc(B)/HA, 2nd semester, Spring 2010
To be discussed at the 1st tutorial
Relates mainly to Blanchard chapter 3
Problem set 1
Problem 1 (chapter 3)
Consider the following model of the economy:
Z≡C+I
C = MPC ∙ Y (MPC: marginal propensity to consume, c1 in Blanchard)
I = I ("planned", “intended”, “desired” investment)
Y=Z
1) Suppose the consumption function is C = 0.7Y and planned investment is 45
a) Draw a diagram showing the aggregate demand schedule
b) What is equilibrium output?
c) Describe in which sense there is a disequilibrium if actual output is equal to, say,
100
[unfortunately, Blanchard does not make much of this point – but nevertheless it is
an important point. Hint: discuss carefully the relation, at Y=100, between output
and sales as well as the relation between “intended”, “planned” investment and
actual total investment]
2) Beginning from equilibrium, investment demand now rises by 15
a) Explain, in purely verbal terms, the ensuing multiplier process
b) How much does equilibrium output increase?
c) How large is the multiplier in this case?
d) What makes up the difference between the eventual increase in output and the
initial increase in investment demand?
3) Assume that people now decide to save a higher proportion of their income: the
consumption function changes from C = 0.7Y to C = 0.5Y.
a) What happens to the equilibrium proportion of income saved?
b) What happens, qualitatively, to equilibrium
income [output]
consumption
investment
savings
4) Explain briefly what is meant by exogenous and endogenous variables by using
examples from above
5) Explain briefly the meaning of the following concepts: Identity, behavioural relation,
parameter, and equilibrium condition – by using examples from above
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2. Problem 2 (chapter 3)
Consider the following model of the economy in the short run:
Z C+I+G
C = co + c1(Y-T), with co>0 and 0<c1<1
G, T and I are exogenous
Y=Z
1) Explain in words what the macro-economic equilibrium is. Illustrate in a diagram.
2) Try to explain why it is true that output can be different from equilibrium output (“be out
of equilibrium”) for extended periods of time
3) Using the equations above, compute the equilibrium income level, disposable income,
private consumption and private saving using the numbers from Problem 2, Chapter 3
(p. 82 in Blanchard’s 5th ed.), where autonomous consumption, investment, public
spending on goods and services and net tax revenue are, respectively, equal to 180, 160,
160 and 120, and where the marginal propensity to consume is put equal to 0.8 (NOTE:
these numbers are not, for some reason, the same as in the previous 4th edition).
4) Compute the effect on the equilibrium income level if there is an increase in government
expenditure (i.e., compute the "multiplier"). Is the multiplier larger than or smaller than
one? Could it be equal to one? Explain.
Problem 3 (chapter 3)
In this problem [which is, admittedly, quite similar to problem 1.3 above], we consider the so-
called "Paradox of Saving" – a macroeconomic finding due to John Maynard Keynes. For
simplicity, we ignore the role of the government (i.e., set G = T = 0). Suppose the
consumption function is C(Y) = co + c1Y, where co>0 and 0<c1<1. Investment I is exogenous.
1) Derive the saving function. What is the marginal propensity to save (MPS)? How is the
MPS related to the marginal propensity to consume?
2) Show, using a diagram showing S and I as a function of Y, that an increase in the MPS
changes equilibrium income. Is saving in the new equilibrium larger than in the
previous, initial equilibrium? What is then the "paradox"?
3) Consider briefly how your conclusions in 2) would be modified if investment (like
consumption) depended positively on Y (this is actually an assumption adopted from
chapter 5 and onwards)
hint: draw the I-curve with a slope which is positive (but less than the slope of the S-
schedule)
4) On TV you hear a politician say: "In order to increase the country's wealth, it is obvious
that we must encourage people to save more."
Use your results above to evaluate this statement: do the results arrived at in 2) and 3)
run counter to this statement?
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