Suppose the economy of Macro Land is represented by the following equations:
Z = C+I+G
C = 400+0.5*YD
T = 400
I = 200
YD = Y – T
G = 600
A. What is the MPC of this economy? What is the MPS? What is the multiplier?
B. Write out the equation that indicates how demand (Z) is a function of income (Y) and the remaining autonomous expenditures. What will be the level of demand if Y=0?
C. Calculate the level of demand for the following levels of income: Y=1800, Y=2000, Y=2200, and Y=2400. Is the economy at equilibrium at any of these levels of income? Explain.
D. When Y=1600, compare the levels of demand and income. How will firms respond to this situation? Briefly explain. Why Y=2400, compare the levels of income and demand. How will firms respond to this situation?
2. Suppose the economy of Paraguay is represented by the following equations:
Z=C+I+G
C=300 + .5*YD
T=400
YD = Y-T
I=200
G=1000
A. Calculate the equilibrium level of output.
B. Using the Z-Y graph, illustrate the equilibrium level of output for this economy.
C. Now assume consumer confidence increases, causing an increase in autonomous consumption from 300 to 400. What is the new equilibrium output? How much does income change as a result of the increase in autonomous consumption? Use calculus to answer this! What is the multiplier for this economy?
D. Graphically illustrate the effects of the change in autonomous consumption on the Z-Y graph.
3. Repeat question 2. But this time assume that MPC = 0.8 Describe the effect of this change on slope of the ZZ function and the size of the multiplier.
4. Suppose the Greek economy is represented by the following equations:
Z = C+I+G
C = 400+ 0.8*YD
T = 600
I = 300
YD = Y – T
G = 800
Note that there is a budget deficit in Greece (really!). Calculate the impact of eliminating the budget deficit on Z and, as a result, on equilibrium Y. Calculate the effect quantitatively and show graphically.
Part II. Write a one-page response to the following (typewritten).
Why is full employment central to a decent society? And what IS full employment? That is, what does it require? Refer to both Pollin and Nayyar in your responses. Do not use direct quotes; rather, paraphrase the authors in your own words. How can full employment overcome the problem of economic stagnation (a slowdown in growth).
