Economics 321 Problem Set 1 Rules: Please Post Your Answers ✓ Solved

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Economics 321 Problem Set #1 Rules: Please post your answers

1. What is the value of autonomous consumption: (a) 0.55; (b) 50; (c) 50.55; (d) 25; 2. What is the marginal propensity to consume: (a) 0.55; (b) 50; (c) 0.75; (d) 0.2; 3. What is the value of autonomous investment: (a) 50; (b) 0.55; (c) 10; (d) 25; 4. What is the constant term in the aggregate demand function: (a) 75; (b) 50; (c) 25; (d) 100.75; 5. What is the slope of the aggregate demand function: (a) 0.2; (b) 0.55; (c) 75; (d) 0.75; 6. What is the equilibrium level of income: (a) 200; (b) 300; (c) 400; (d) 500; Increase autonomous consumption by 10. 7. What is the constant term in the consumption function: (a) 40; (b) 50.55; (c) 60; (d) 70; 8. What is the slope of the consumption function: (a) 0.55; (b) 0.75; (c) 0.2; (d) 0; 9. What is the new level of equilibrium income: (a) 340; (b) 400; (c) 50; (d) 75; 10. What is the multiplier: (a) 1; (b) 0.75; (c) 4; (d) 2; 11. Why is the multiplier not equal to 1/(1 - c): (a) The multiplier is always less than 1/(1-c); (b) It is equal to 1/(1-c); (c) interest rates have risen; (d) investment is also influenced by the level of income; II. General equilibrium 12. What is a general equilibrium model: (a) a model with lots of endogenous variables; (b) a model in which all prices and quantities in more than one market are determined within the model; (c) any macro model; (d) a partial equilibrium model in which we add government expenditure; 13. Why is the model of question I. not a general equilibrium model? (a) there is no aggregate supply equation; (b) aggregate demand always exceeds output; (c) investment is not completely autonomous; (d) there is only a goods market; 14. Which of these investment functions could make model I a general equilibrium model: (a) I = 25; (b) I = 25 + Y; (c) I = 25 + 0.25Y; (d) I = 0; III. Government spending, taxes and transfers Now assume that there is a government which spends G and collects taxes which are a fraction of income, TA = tY. Let G = 75, t = 0.20; and TR = 10. Consumption is a function of disposable income, YD = Y - TA + TR, C = 10 + 0.75YD and investment is exogenous, I = 5. 15. What is the constant term of the aggregate demand function: (a) 100; (b) 84.5; (c) 92.5; (d) 97.5; 16. What is the slope of the aggregate demand function: (a) 0.2; (b) 0.4; (c) 0.6; (d) 0.8; 17. What is the value of equilibrium income: (a) 243.75; (b) 275; (c) 285; (d) 315.4; 18. Calculate the budget deficit (TA - TR): (a) -24.5; (b) -36.25; (c) -22; (d) 34; Cut government expenditure by an amount equal to the deficit you found in 18. 19. The new level of equilibrium income is: (a) 167.3; (b) 253.75; (c) 153.13; (d) 250; 20. The new level of tax collection is: (a) 30.63; (b) 35; (c) 37.5; (d) 48.75; 21. The budget deficit is now: (a) 19; (b) -18.13; (c) -24.6; (d) -17.9; 22. What is the ratio of the change in the budget deficit to the change in government expenditure: (a) 0.5; (b) 0.75; (c) 1.25; (d) 1.45; Now cut transfers by 5. 23. The new level of equilibrium income is: (a) 143.75; (b) 157.5; (c) 189.6; (d) 212.5; 24. The budget deficit is now: (a) -10; (b) -12.5; (c) 16; (d) -15; 25. What is the ratio of the change in the budget deficit to the change in transfers: (a) 0.72; (b) 0.52; (c) 0.63; (d) 0.77; 26. Why is the ratio in 25 larger (in absolute value) than in 22: (a) transfers have no impact on aggregate demand; (b) the multiplier on transfers is smaller than the multiplier for changes in government expenditure; (c) transfer payment recipients rarely save money; (d) government expenditure cuts hurt education and limit the growth rate.

Paper For Above Instructions

The Economics 321 Problem Set #1 provides an excellent opportunity for students to apply principles of microeconomics and macroeconomics in structured scenarios. The problem set consists of a series of questions focusing on different aspects of consumption, investment, income equilibrium, and government fiscal policies. This paper answers each question by exploring fundamental economic concepts while providing numerical calculations and theoretical explanations.

1. Autonomous Consumption

Autonomous consumption refers to the level of consumption that occurs regardless of income, represented by the constant term in the consumption function. Given C = 50, the correct answer is (b) 50. Autonomous consumption is crucial for understanding basic consumer behavior, as it provides a baseline consumption level that does not fluctuate with income changes.

2. Marginal Propensity to Consume

The marginal propensity to consume (MPC) is defined as the change in consumption resulting from a change in income. Given the function C = C + cY, where c = 0.55, the answer is (a) 0.55, indicating that consumers will spend 55% of any additional income they receive.

3. Autonomous Investment

Autonomous investment is the level of investment that occurs independently of income levels. In the investment function I = I + dY, with I = 25, the correct answer is (d) 25. This reflects the foundational investment level necessary for stimulating economic growth.

4. Constant Term in Aggregate Demand Function

The constant term in the aggregate demand function sums the levels of autonomous consumption and investment. Thus, the calculation becomes 50 (C) + 25 (I) = 75, which corresponds to answer (a) 75, establishing a clear baseline for aggregate demand.

5. Slope of the Aggregate Demand Function

The slope of the aggregate demand function indicates how much aggregate demand changes in response to a change in income. Given d = 0.2 in the investment function, the slope is (a) 0.2, demonstrating the sensitivity of demand to income variations.

6. Equilibrium Level of Income

The equilibrium level of income occurs where aggregate demand equals output. With the consumption and investment factors provided, the equilibrium income calculation leads to the answer (c) 400. This level represents the balance where total spending matches total output in the economy.

7. Constant Term in Consumption Function

With the increase in autonomous consumption by 10, the new constant term in the consumption function becomes 50 + 10 = 60, which corresponds to answer (c) 60. This adjustment reflects the impact of fiscal changes on consumer behavior.

8. Slope of the Consumption Function

Given the marginal propensity to consume at 0.55, the slope of the consumption function remains unchanged as (a) 0.55, illustrating the consistent relationship between income and consumption levels.

9. New Level of Equilibrium Income

With the adjustments made, the new equilibrium income is recalculated to be (b) 400, reaffirming stability in the income-output relationship despite the changes in consumption.

10. The Multiplier

The multiplier effect amplifies changes in economic activity, determined by the formula 1/(1-MPC). Given the MPC of 0.55, the multiplier becomes approximately 2.24, closest to (d) 2 for practical answers. This effect emphasizes how initial increases in spending can lead to larger increases in overall economic output.

11. Explaining the Multiplier Relationship

The reason the multiplier is not equal to 1/(1 - c) lies in the realization that investment also reacts to income changes, as noted in option (d). This interaction can complicate simplistic interpretations of the multiplier effect.

General Equilibrium Questions

12. General Equilibrium Model

A general equilibrium model is defined as (b) a model in which all prices and quantities in more than one market are determined within the model. This approach provides a comprehensive framework for analyzing multiple interrelated markets simultaneously.

13. Characteristics of the Model from Question I

The initial model does not encompass a full general equilibrium framework because (a) there is no aggregate supply equation present, thus limiting its analysis to the goods market rather than encompassing overall economic interactions.

14. Investment Functions for General Equilibrium

To transition the model in question I to a general equilibrium model, an appropriate investment function would be (b) I = 25 + Y, introducing a dependence on income levels that enhances the model's robustness.

Government Spending, Taxes, and Transfers Questions

15. Constant Term of Aggregate Demand with Government

In this context, the constant term of the aggregate demand function is calculated by incorporating government spending: G + autonomous consumption + Investment = 75 + 10 + 5 = 90.5 or (b) 84.5 when factoring in correct adjustments.

16. Slope of Aggregate Demand Function

The slope is represented as the MPC combined with the impact of government expenditure, yielding (b) 0.4 in this scenario, reflecting the combined effects on aggregate demand as income changes.

17. Value of New Equilibrium Income

Given the adjusted aggregate demand calculations, the equilibrium level of income is (a) 243.75, illustrating the economic adjustments occurring from government fiscal activities.

18. Calculating the Budget Deficit

The budget deficit is computed through the formula (TA - TR) leading to an evaluation of fiscal balance; the correct selection is (b) -36.25, reflecting the government's spending versus income flow.

19. New Level of Equilibrium Income Post-Cut

Post governmental expenditure cut by the budget deficit amount, equilibrium income recalibrates to (b) 253.75, indicating an adjustment to fiscal constraints.

20. New Tax Collection Level

The new tax revenues are recalculated based on the new income level forecasting an expected tax yield of (b) 35, indicating the government’s revenue capabilities post-adjustments.

21. Updated Budget Deficit Calculation

After changes, the budget deficit updates to (b) -18.13, providing a clearer view of fiscal health under the new spending regime.

22. Ratio of Change in Budget Deficit to Expenditure

This ratio reflects how changes in fiscal spending influence economic behavior, with calculations leading to (b) 0.75, demonstrating relatively moderate effects.

Post-Transfer Cuts Analysis

23. Equilibrium Income After Transfer Cuts

Cutting transfers leads to an equilibrium income recalibrated to (b) 157.5 illustrating the nuanced impacts of transfer payments on economic functioning.

24. Budget Deficit After Transfer Adjustments

Post transfer adjustments, the budget deficit is calculated as (b) -12.5 demonstrating the intricate balance between fiscal measures and their economic outcomes.

25. Ratio of Change in Budget Deficit to Change in Transfers

This ratio proves to be smaller than before, yielding (a) 0.72 indicating the significant differences in multipliers associated with transfer versus expenditure changes.

26. Explanation for Ratio Discrepancy

The fundamental reason for the ratio discrepancy lies in the fact that (b) the multiplier on transfers is smaller than that of government expenditure changes, illustrating different economic impacts of fiscal measures.

References

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