Macroeconomics
Exercises for Chapter 3
Question 1:
Suppose in an open economy the consumption function take the form
Tax is the proportion of income with the tax rate to be given by 0.2. Meanwhile import depends on the domestic income with the function given by
Assume investment, government expenditure and export to be respectively equal to 2000, 2500 and 1000. Using the IS model to answer the following questions:
1). What is the equilibrium level of output Y?
2). What is the equilibrium level of saving S?
3). Is the government financially in deficit or in surplus? Please also calculate the exact number of this deficit or surplus.
4). Is the economy in trade deficit or in trade surplus? Please also calculate the exact number of this deficit or surplus.
5). Is saving equal to investment in this case? If not, please express why and define the corresponding saving-investment identity in an open economy..
6). What is the value of multiplier in this case?
Question 2:
Continued with question 1. Suppose now there is an additional government expenditure, which is given by 200.
1). What is the new level of equilibrium of output?
2). Express the multiplier process for this injection of government expenditure.
Question 3:
Continued with question 1: Suppose now that the government wants to increase output by 1000. What it can do is to increase its expenditure. How much expenditure should it increase?
