Economics Quiz 2

Name: Econ 102 Group 4 (Quiz 2)

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1) Equilibrium output in a closed economy is 1200, consumption is 600, and investment is 160.

Calculate:

a) Government spending (G)(10pts)

Y=C+I+G

1200=600+160+G

G=1200-600-160 = 440

b) If investment increases by 60. The marginal propensity to consume out of national income is 0.5.what is the new equilibrium level of Y,C,I, and G(10pts)

Y*= I = 60 New Y*=Y0+ Y

1-mpc 1-0.5 New Y*=1200+120 = 1320

Y* = 120 New C = mpc (newY*) = 0.5(1320) = 660

New I= I0+ I = 160+60 = 220

New G = G0 = 440

c) If potential output is 1500, to what extent must G rise to make output equal to potential output?(10pts)

Actual output=1320

Potential output =1500

To make Actual = potential means Actual output will increase by 1500-1320=180

Y*= G

1-mpc

180 = G

1-0.5

G =180(0.5) =90

2) a) Aggregate demand in an economy trading internationally with a government sector can be written as AD=C+I+G+NX (5pts)

b) Suppose the marginal propensity to consume is 0.6, the marginal tax rate is 0.5 and the marginal propensity to import is 0.8.What is the size of the multiplier (5pts)

Multiplier = 1 = 1 =0.666

1-c(1-t)+mpz 1-0.6(1-0.5)+0.8

3) Fill in the table below(20pts)

| Government comes to Hypothetica |

|Planned consumption |Planned investment |Government spending |Import |Export |Aggregate demand |

|28 |60 |50 |12 |10 |136 |

|56 |60...