1.
The equation below describes the economy of Mataland
Consumption expenditure C=400+0.8(Y-T)
Investment I =150
Government Purchase: G=50
Taxes: T=100
Exports X= 180
Imports M=30+0.3Y
a. What is the value of marginal propensity to consume?
b. What are the government spending and tax multipliers in this economy?
c. Solve for the equilibrium income and equilibrium consumption.
d. Assume government wants to increase the equilibrium level of income to Y*=2000. By how
much should government purchases be changed?
e. If G rises to 100, then by how much would equilibrium income change? And what is the new
equilibrium income.
f. Assume that the full employment output is 1000. Is the economy in an inflationary or
deflationary gap?
g. If tax falls to 80, by how much will equilibrium income rise?
2. Suppose that the economy is characterized by the following structural equations:
C = 160 + 0.6 (Y –T)
I =150; G = 150; T = 100.
A) Determine the equilibrium output level.
b) If G rises to 200, what is the how equilibrium level of output? What is the value of the govt.
expenditure multiplier?
c) If tax falls to 50, by how much will equilibrium output rise?
d) What is the value of tax multiplier?
3. Jane Do has the following assets. Identify which are in M1, which are in M2, or in neither M1 nor
M2
a. $100 in her wallet
b. $800 in her checking account
c. $1,000 in her savings account
d. A $20 traveler’s check from her last business trip to China.
e. A $300 outstanding credit card bill.
f. $3,000 in a small certificate of deposit
g. A car worth $5,000.
h. A house, worth $200,000.
i. Suppose she takes the $100 in her wallet and deposits it in her checking account. What is the
change in M1 and M2?
j. Suppose she takes $400 from her checking account and deposits it in her savings account. What
is the change in M1 and M2?
4. Which of the following would serve as a contractionary or expansionary monetary policy
a. Sell bonds on the open market.
b. Increase the reserve requirement ratio.
c. Increase the discount rate.
d. Buy bonds on the open market.