ECO 4 Problems Assignment Solution

Given the following model:
Y = C + I + G + (X-M)
Question 1
Suppose that:
Autonomous Consumption = $500
MPC = 0.75
Taxes = $400
Investment = $500
Government Spending = $1200
Exports = $300
Imports = $500
Find the following: (2 points each)
A. Equilibrium income
B. Equilibrium consumption
C. Equilibrium saving
D. Write the savings function
E. Show that injections equal withdrawals
Question 2
Suppose that full employment GNP (FE Y) is = 4000 (2 points each)
A. Explicitly find the necessary change in G to get the economy to full employment GDP.
B. Explicitly find the necessary change in Taxes to get the economy to full employment GDP.
Question 3
Given the position of the economy in question one and that full employment GDP = 4000
explain how the following monetary policies would get the economy to full employment
GDP (1.5 point each)
A. Open market operations
B. Discount rate
C. Federal funds rate
D. Required reserve ratio
Question 4
Suppose a country repeals an investment tax credit and that leads to a decrease in investment
spending of $10 billion. Using your AD-AS model, illustrate (draw) what happens to this

economy after the tax credit was repealed. Suppose the MPC for this economy is 0.8. (10
points)
A. Are they experiencing a recessionary or expansionary gap?
B. Will the aggregate demand or aggregate supply change and by how much?
C. If the government established full employment using only tax policies, by how much
would they have to change taxes?
D. When drawing your graph, start off in long-run equilibrium and show how the economy
changes due to the investment tax credit being repealed. Label your graph and explain each
step.