Question

1 of 2 Econ 202: Intermediate Macroeconomics Problem Set 1: Goods markets Spring 2019 This assignment is due in hard copy at the beginning of class on Thursday February 7 Remember that the process of how you arive at an answer is as important as the ans wer itself For full credit you are required to show all steps and work, clearly labelall graphs, and fully explain any answers that ask for an explanation. Question 1: Calculating GDP Consider an economy with three firm Firm 1 sells S50 of steel to Firm 3. From its earnings, it pays $20 in wages and keeps $30 in profits Firm 2 sells $30 of rubber to Firm 3. Firm 2 pays $10 in wages and keeps $20 in profits Firm 3 sells $260 of cars to houscholds. It pays for its inputs (from Firm I and Firm 2) keeps one third of its remaining earnings as pays two thirds in Let's calculate GDP various ways. Show your work (ie. do not just write a final answer for parts (b) and (c): instead, show me how you got there). (a) What is the final value of goods and services? (b) Calculate GDP as the sum of value added (c) Calculate GDP as the sum of all incomes camed in the economy. Note that, in order to do this, you first need to calculate wages and profits for Firm 3 Question 2: Working with the Keynesian cross model Consider the following hypothetical economy С 140 + 0,6(Y-T) 200 G 150 T 150 All variables are in units of constant dollars per year (S). (a) What is the equilibrium level of GDP (n? Make sure that you start from the equilibrium condition, and show your work]. (b) Using your answer to (a), solve for the following variables in equilibrium: i Disposable income ii Consumption spending (C). ii. Aggregate demand (Z). Show that the level of aggregate demand is equal to the equilibrium level of GDP What is the government spending multiplier in this economy GDP increase? (c) Let's analyze fiscal policy ii. Say that the govarnment increases government spending by 100. How much does (d) Now assume that investment is described by100+0.3Y. (Return government spending to the original level of 150)

Answer 1

C = 140 + 0.6 (Y - T) I = 200 G = 150 T = 150 a) at eqn Y = C + I + G Y = 140 + 0.6 (Y - 150) + 200 + 150 Y = 140 + 0.6Y - 90 + 350 0.4 Y = 400 Y = 1000 Y_D = Y - T = 1000 - 150 = 850 C = 140 + 0.6(850) = 650 Multiplies = 1/1 - c + ct = 1/1 - 0.6 = 2.5 GDR uparrow by 2.5(100) = $250 I = 100 + 0.3Y Y = 140 + 0.6 Y - 90 + 100 + 0.3Y + 150 Y - 0.9Y = 300 Y = 3000