Macroeconomics Answers

Please help. I am so confused with all the equations.

Consider an open economy with S = 0.2Y, M = 0.15Y, T = 0.15Y, where S is the savings function, M is the induced imports and T is the tax function.

Further assume the following autonomous components: C0 = 450, G = 950, I = 500; M = 0; and X = 1 000.

3.1.1 Calculate the open economy multiplier. (3)

3.1.2 Calculate the equilibrium income. (2)

3.1.3 Calculate the value of savings. (3)

3.1.4 Calculate the value of net exports, and comment on the external position of the economy based on your answer.(2)

These are my answers, please let me know if I am on the right track:

3.1 Open economy multiplier = 1 / MPS + MPM + MPT

           = 1 / 0.2 + 0.15 + 0.15 = 1 / 0.5

= 2

3.2      Y = C + I + G + (X – M)

           Y = 450 + 500 + 950 + 1000

           Y = 2900

3.3     S = 0.2Y

           = 0.2 (2900)

           = 580

3.4      Net exports = (X-M) = 1000

           The country exports more goods than it imports and therefore has a trade surplus.

Across the entire economy it is expected that inflation will rise. The result will be the _____ curve will shift _____.

A. AD; rightward

B. SRAS; upward

C. SRAS; downward

D. AD; until it becomes vertical

At a specific inflation level people from other countries are more willing to buy goods and services from the U.S. As a result, the _____ will shift _____.

A. aggregate demand curve; right 

B. short-run aggregate supply line; downward 

C. aggregate demand curve; left 

D. short-run aggregate supply line; upward

If inflation is high, this will do what to money’s real value? As a result of the change in the real value of money short-run equilibrium output will _____.

A. reduce; increase 

B. increase; decrease 

C. reduce; decrease 

D. increase; increase

What happens to the demand for money if real income declines. It will _____. 

What happens to the demand for money if the overall price level declines. It will _____.

A. increase; increase

B. increase; decrease

C. increase; not change

D. decrease; decrease

Consider the following data:

PAE = 4,500 + 0.7Y – 25,000r

Interest rate = 6%

Y* = 11,750

The Fed should _____ the interest rate in order to close what type of gap.

Planned spending is as follows: C = 600 + 0.7(Y – T) – 200r, IP = 200 – 500r, G = 200, NX = 10 and T = 150. Which of the following also states PAE?

A. [905 – 700r] + 0.3Y

B. [905 – 700r]

C. [910 – 700r]

D. [905 – 700r] + 0.7Y

Currently, commercial banks have a 5% reserve/deposit ratio. The Federal Reserve decreases the reserve ratio to 3%. This means banks could _____ loans and deposits. It also means the money supply could _____.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

Keynesian economists would like PAE to go up by $20 billion. The mpc = 0.80 so government spending needs to go up by _____ OR taxes need to go down by _____.

A. $20 billion; $20 billion

B. more than $20 billion; more than $20 billion

C. less than $20 billion; less than $20 billion

D. $20 billion; more than $20 billion

According to Keynesian economists, closing a short-run expansionary gap of $5 million means government purchases will need to be:

A. increased by $5 million.

B. decreased by $5 million.

C. increased by more than $5 million.

D. decreased by less than $5 million.