Question

Econ 105A Jang-Ting Guo Handout/Homeowork 4 1. The following equations describe an economy. Think of C, 1, G, etc., as being measured in billions and i as a percentage, e.g., a 5 percent interest rate implies i = 5. C = 0.8(1-t)Y t = 0.25 I = 900 - 50i G = 800 L = 0.25Y - 62.5i M=500 P=1 (a) What are the (1) marginal propensity to consume out of disposal income and (ii) marginal propensity to consume out of total income? (b) Derive the equation that describes the IS curve. (c) Derive the equation that describes the LM curve. (d) Solve for the equilibrium levels of (i) income, (ii) interest rate, (iii) consumption, (iv) investment, (v) money demand and (vi) real money supply. (e) What is the resulting equilibrium government budget surplus?

Answer 1

a) - marginal propensity to consume = 0.8 ew e disposable income marginal propensity to consume out a total in won = 0% (1 025) 28 of 3 105 toxx = 315 = 0.6 Y = 0 B 11-0.25 +900-soi + Boo Y C + I + G S y oby + 1700 - Soi 044 = 170o - soi Y = 4250 - 125 i a) 500/ 500 0.25 y 62.5 i MP = 0259 - 62.5 i = 5oo. Y = 2000 & a soi 2000 + 250i = 4250 - 125 i 375 i = 2250 3500 out Ya 2000 + 20 ) = 6 0311-0.25) eonc = tzog 2100 I = 900 so 6 = 899 600 mo 0.25/2015) - 62.510 06) = sou m = soo Govt surplus : 0.25Y - G - 3500 - 800 = 75.