Homework 3
- Present value of a future return:
Suppose you plan to buy a brand new car in 3 years that requires a $2,000 down payment. A bank offers you an annual fixed interest rate at 4.7%. How much should you save now to have $2,000 in 3 year for your down payment? In other words, what is the present value of $2,000 in 3 years? (2 points
- The consumption Function:
- The table below shows disposable income (Yd=GDP), consumer spending (C), and planned investment (I planned) in economy X. Assume there is no government (G), nor foreign sector (x – m). Fill in the blanks. (3 points)
(Billions of dollars)
| GDP = Yd Aggregate supply | C (Consumer spending) | I planned (Planned investment) | AE planned (Planned aggregate spending) Aggregate Demand | Unplanned Investment (I unplanned)
|
| $0 | $100 | $300 | ||
| 400 | 400 | $300 | ||
| 800 | 700 | $300 | ||
| 1,200 | 1,000 | $300 | ||
| 1,600 | 1,300 | $300 | ||
| 2,000 | 1,600 | $300 | ||
| 2,400 | 1,900 | $300 | ||
| 2,800 | 2,200 | $300 | ||
| 3,200 | 2,500 | $300 |
- What is the aggregate consumption function formula (C)? (1 point)
- At what level of GDP (i.e. Yd), is this economy at income-expenditure equilibrium Y*, (Y* is the point at which (GDP=Yd) = AE? (2 points)
- d. What is the value of the multiplier? (2 points)
- e. If autonomous consumer spending (C) increases to $200 billion, what will be the new income-expenditure equilibrium (the new Y*, where GDP = AE)? (2 points)
[f For 3 extra points plot the AE against a 45-degree line: Place (GDP =Yd) on the horizontal axis, and AE on the vertical axis- hint: see page 770 (4th edition).]
- Aggregate Demand, Aggregate supply, and Fiscal policy.
The diagram below shows the current macroeconomic situation in county X.
Help the economy in country X to move to potential, full employment GDP, output at 10 trillion GDP.
- Is country X facing a recessionary or an inflationary gap? (1 point)
- Which type of fiscal policy (expansionary or contractionary) would move country X to potential, full employment GDP, output level, at $10 trillion real GDP? (2 points)
- Give examples of such policy. (2 points)
- Illustrate the macroeconomic situation in country X with a diagram after the successful fiscal policy has been implemented. (1 point)
- Aggregate Demand.
Give 1 reason why there is an inverse relationship between aggregate price level (or the inflation rate) and quantity of real GDP demanded in the economy. (2 points)
