### Questions to Prepare Chapters 9, 10 and 11

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Calculate the equilibrium value of Income. Show all your work

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Suppose that the economy is not at equilibrium and instead output/income is Y=24,000

a)    At this value of income/output(Y=24,000) calculate the change in inventories. Be sure to specify if it is a positive change (an increase) or a negative change (a decrease). Show all your work

b)   At this value of income/output(Y=24,000) and given your answer for the change in inventories what would you expect firms to do in terms of output levels? (Increase/decrease/leave unchanged)

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, use the multiplier to calculate the CHANGE in equilibrium output that would result if the government were to decrease government spending by 600.

a)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, use the multiplier to calculate the CHANGE in equilibrium output that would result if the government were to decrease taxes by 600.

a)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, use the balanced budget multiplier to calculate the NEW EQUILIBRIUM OUTPUT LEVEL that would result if the government decreases government spending by 500 and at the same time, decrease taxes by 500. Answer:               Show all your work

a)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, assume that the economy is in a recession and that the full employment level of output is Y = 29,000.

a)     Use the multiplier to calculate the necessary CHANGE in government spending that would get the economy out of the recession and into full employment.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

c)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, assume that the economy is in a recession and that the full employment level of output is Y = 29,000.

a)     Use the multiplier to calculate the necessary CHANGE in taxes that would get the economy out of the recession and into full employment.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

c)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

1. Consider the following equations for a closed economy (no foreign sector) with government.

C = 2500 + 0.75Yd

I = 1000

G = 2000

T= 1000

Starting from the original equilibrium value, assume that the economy is in a recession and that the full employment level of output is Y = 19,900.

a)     Suppose the government wants to leave the deficit/surplus unchanged. Use the multiplier to calculate the necessary CHANGE in government spending and taxes that would get the economy out of the recession and into full employment without increasing the deficit/surplus.

b)     What would be the impact (increase/decrease/remain the same?) of this policy on consumption? To answer this question, calculate the value of consumption at full employment and compare it with the original value.

c)     What would be the impact (increase/decrease/remain the same?) of this policy on the government’s budget deficit/surplus? To answer this question, calculate the new surplus/deficit and compare with the original situation.

9. Use the diagram below to show the effect of each of the following events on AE, AD, AS, prices and GDP. Label the axes, label the lines and draw any shifts. Identify clearly the original values: label these original values Y0, AE0, AD0, AS0, P0, GDP0. Identify clearly the NEW values: label these NEW values Y1, AE1, AD1, AS1, P1, GDP1. Write a complete explanation of the chain of events starting with the event ending with the change in GDP and prices.

a. A round of collective bargaining in the industrial sector leads to relatively high wage increases
b. Pessimistic business forecasts lead businesses to reduce their planned investment

c. An announcement of major increases in social security retirement benefits leads people to reduce their personal saving.
d. The population grows, increasing both the labor force and the demand for goods and services.
e. A massive earthquake which destroys a large number of factories is followed by a major increase in industrial investment, as firms attempt to replace their productive capacity.

f. Prices Increase (decrease): in BOLD because changes in prices do not shift the AD line!
g. NX Increase (decrease)
h. Exports Increase (decrease)
i. Imports Increase (decrease)
j. Wealth Increase (decrease)
k. Interest rates Increase (decrease)
l. Technological Improvement
m. Government spending Increase (decrease)
n. Taxes Increase (decrease)
o. Transfers Increase (decrease)