Economics 102
L. Stone
Quiz 6
1. In the short run, the following information describes the economy:
C = 1000 + .75(Y-T)
I = 400
G = T = 300
a. Find equilibrium GDP. (5 points)
Y = 1000 + .75(Y-300) + 400 +
300
Y = 5900
b. Find the change in GDP if investment falls TO 300. (5 points)
change in Y = 4*100 = 400
4 = 1/(1-.75)
c. Find the change in GDP if taxes increase TO 700. (5 points)
change in Y = -3*400 = -1200
-3 = -.75/(1-.75)
d. Assume that nothing has changed since part a.
The savings function for this economy is S = -1000 + .25(Y-T).
1. What are the current equilibrium levels of C and S? (2 points)
C = 1000 +
.75(5900 – 300) = 5200
2. Suppose that consumes decide to save $200 LESS. Carefully explain what will happen in this economy AND WHY, and what the effect will be on equilibrium GDP, consumption, and savings. (You must calculate Y, C, and S to receive full credit, and a graph would probably help your answer.) (8 points)
If savings
falls, consumption rises.
C =1200 + .75(Y-T)
Since C
increased by 200, change in Y = 4*200 = 800
New Y = 6700
C = 1200 +
.75(6700 – 300) = 6000
Savings
remains the same. This is because the
increase in savings from current income increases (since income rises), and
this is just exactly enough to offset the decrease in autonomous savings.