Solution to exercise 2

1
ECON 2313
Solution to exercise 2

• Part 1
• a 700
• b ?C/?YD 850/1000 0.85
• C 700 0.85YD 700 (0.85)(4666.66)
  4,666.66
• ?C b ?YD 0.85 ?YD ?YD - ?T - 40.? ?C
  (0.85)(-40) -34

2
Figure 1
C (billions)
4666.66
700
0
YD (billions)
4666.66
3
Part 2

• The multiplier is given by 1/(1-b)
  1/(1-0.75)1/0.25 4
• The aggregate expenditure function is given
  byAE 600 (.75)(400) .75Y 600 700
  50 1550 0.75Y
• Use the following formula to solve for
  equilibrium GDP (Y)

Thus we have
4
AE(billions)
Figure 2
AE 1550 0.75Y
E
1550
450
6,200
Real GDP(billions)
5
4. First we compute the change in equilibrium GDP
(Y)
Note that ?YD ?Y 200Thus we have ?C
b ?YD (0.75)(200) 150
5. AE 1550 0.75Y. Now we compute AE
when Y 6,500 AE 1550 (0.75)(6,500)
6425 Y gt AE by 75 hence we have
positive unplanned inventory
investment equal to 75.
6
Panel A
Increase in government expenditure, ceteris
paribus
AE(billions)
AE2
?
AE1
?
450
Y2
Y1
Real GDP(billions)
7
Decrease in interest rates, ceteris paribus
Panel B
AE(billions)
AE2
?
AE1
?
450
Y2
Y1
Real GDP(billions)
8
Stock market crash, ceteris paribus
Panel C
AE(billions)
AE1
AE0
?
?
?
450
Y1
Y0
Real GDP(billions)
9
Increase in net taxes, ceteris paribus
Panel D
AE(billions)
AE1
AE0
?
?
450
Y1
Y0
Real GDP(billions)
10
Increase in exports, ceteris paribus
Panel E
AE(billions)
AE2
?
AE1
?
450
Y2
Y1
Real GDP(billions)