Assignment 1 (8 marks)
The submission due date is on Thursday 11/3/2021. Please submit it via Blackboard.
• Please submit your homework in the word file. No other form of submission is
acceptable.
• For any diagrams, you can draw it on a piece of paper, then copy and paste it as a photo
in your word file.
1. Suppose that the economy is characterized by the following behavioral equations:
C = 160 + 0.6YD
I = 150
G = 150
T = 100
Solve for the following variables.
a. Equilibrium GDP (Y)
b. Disposable income (YD)
c. Consumption spending (C)
ANSWER:
a. Equilibrium GDP = Output Y*
Y= C+I+G
(160 + 0.6YD) +150 + 150
460 + 0.6(Y-100)
460 + 0.6Y – 60
400 + 0.6Y
(1-0.6) Y = 400
Y = 400/(0.4)
Y* = 1000
b. Disposable income (YD)
YD= Y* – 100
1000 – 100
Y*D = $900
1
, c. Consumption spending (C)
C= 160 + 0.6YD
160 + 0.6(900)
160 + 540
C* = $700
2. Use the economy described in Problem 1.
a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.
b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand.
Is it equal to production? Explain.
c. Assume that G is equal to 110, so output is given by your answer to (b). Compute private
plus public saving. Is the sum of private and public saving equal to investment? Explain.
ANSWER
a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.
− Equilibrium output as above Y* = 1000
− Demand = ZZ = C + I + G = 700 +150 + 150=1000
Total demand equals to total output Y*
Since the economy is in equilibrium, Y = GDP = ZZ
b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand.
Is it equal to production? Explain.
It is a reduction in G by 40
− (1-0.6) Y = 400 – 40
Y = 360/.0.4
Y1* = 900
− ZZ = C + I + G =900 (Show your calculation)
ZZ = 900
Total demand equals to total output Y1*
Since the economy is in equilibrium, Y = GDP = ZZ
2
The submission due date is on Thursday 11/3/2021. Please submit it via Blackboard.
• Please submit your homework in the word file. No other form of submission is
acceptable.
• For any diagrams, you can draw it on a piece of paper, then copy and paste it as a photo
in your word file.
1. Suppose that the economy is characterized by the following behavioral equations:
C = 160 + 0.6YD
I = 150
G = 150
T = 100
Solve for the following variables.
a. Equilibrium GDP (Y)
b. Disposable income (YD)
c. Consumption spending (C)
ANSWER:
a. Equilibrium GDP = Output Y*
Y= C+I+G
(160 + 0.6YD) +150 + 150
460 + 0.6(Y-100)
460 + 0.6Y – 60
400 + 0.6Y
(1-0.6) Y = 400
Y = 400/(0.4)
Y* = 1000
b. Disposable income (YD)
YD= Y* – 100
1000 – 100
Y*D = $900
1
, c. Consumption spending (C)
C= 160 + 0.6YD
160 + 0.6(900)
160 + 540
C* = $700
2. Use the economy described in Problem 1.
a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.
b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand.
Is it equal to production? Explain.
c. Assume that G is equal to 110, so output is given by your answer to (b). Compute private
plus public saving. Is the sum of private and public saving equal to investment? Explain.
ANSWER
a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain.
− Equilibrium output as above Y* = 1000
− Demand = ZZ = C + I + G = 700 +150 + 150=1000
Total demand equals to total output Y*
Since the economy is in equilibrium, Y = GDP = ZZ
b. Assume that G is now equal to 110. Solve for equilibrium output. Compute total demand.
Is it equal to production? Explain.
It is a reduction in G by 40
− (1-0.6) Y = 400 – 40
Y = 360/.0.4
Y1* = 900
− ZZ = C + I + G =900 (Show your calculation)
ZZ = 900
Total demand equals to total output Y1*
Since the economy is in equilibrium, Y = GDP = ZZ
2
