Economics Answers

Suppose the demand for good X is given by Qd = 300 – 5Px - 5Py + 20 I where Px is the price of good X. Py is the price of some other good Y, and I is income. Assume that Px is currently $1, Py is currently $2, and I is currently $50.The income elasticity is

3.8Consider first the goods market model with constant investment that we saw in Chapter 3. Consumption is given by:
C = Co + c1(Y-T)
And I, G and T are given.
a. Solve for equilibrium output. What is the value of the multiplier? Now let investment depend on both sales and the interest rate: I=b0 +b1Y-b2i
b. Solve for equilibrium output using the methods learned in chapter 3. At a given interest rate, why is the effect of a change in autonomous spending bigger than what it was in part (a)? Why? (Assume c1 + b1 = 1)
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c. Solve for equilibrium level of investment.
d. Let’s go behind the scene in the monetary market. Use the equilibrium in the money market M/P = d1Y – d2i to solve for the equilibrium level of the real money supply.
How does the real money supply vary with government spending?

3.9Consider the following IS-LM model: C = Co + c1(Y-T)
I=b0 +b1Y-b2i
M/P = d1Y – d2i
a. Solve for equilibrium output. Assume (Assume c1 + b1 < 1). Now let investment depend on both sales and the interest rate: b. Solve for equilibrium level of interest rate.
Let’s go behind the scene in the monetary market. Use the equilibrium in the money market M/P = d1Y – d2i to solve for the equilibrium level of the real money supply.
How does the real money supply vary with government spending?

3.7So far, we have been assuming that the fiscal policy variable T is independent of the level of income (exogenous). In the real world, however, this is not the case. Taxes typically depend on the level of income, so tax revenue tends to be higher when income is higher. In this problem, we examine how this automatic response of taxes can help reduce the impact of changes in autonomous spending on output.
Consider the following model of the economy: C=C0 +c1Yd
T=t0 +t1Y
Yd = Y - T
G and I are both constant (exogenous).
a. Is t1 (marginal propensity to tax) greater or less than one? Explain.
b. Solve for equilibrium output.
c. What is the multiplier? Does the economy respond more to changes in
autonomous spending when t1 is zero or when t1 is positive? Demonstrate.

3.6Suppose that the economy is characterised by the following behavioural equations:
C=C0 +c1Yd Where:
C0 = 280
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I = 270
G = 300
T = 200
Marginal Propensity to Save (MPS) is 0.4 (or 40%) Solve for:
a. equilibriumGDP(Y).
b. disposable income (Yd).
c. consumptionspending(C).

3.4Suppose that the real GDP increase by R5,000 billion when government expenditure on the construction of new roads increase by R1,500 billion. What is the value of the marginal propensity to consume?
3.5Assuming that the central government decides to cut taxes by R100 billion to stimulate the economy. The relevant marginal propensity to consume is 0.6 (60 percent). What will be the impact of such fiscal policy on equilibrium GDP?

3.2If a R200 billion increases in investment spending creates R200 billion of new income in the first round of the multiplier process and R160 billion in the second round. Calculate:
a. the marginal propensity to consume (MPC).
b. the value of the expenditure multiplier in this closed economy.
3.3 Assuming a private closed economy whereby the marginal propensity to consume is 0.9 and investment spending decreases by R1000 billion. What will be the change on equilibrium GDP?

2.3Assuming that South Africa economy experience a high level of inflation. The SARB makes use of monetary policy to decrease the inflation rate.
a. Mention one of the instruments of monetary policy and describe how the SARB will manipulate it.
b. Explain by the use of graphs, the impact of such monetary policy on aggregate output. In your explanation, describe the interaction between the Money market, IS-LM and AD-AS Model.

2.2Assuming that South Africa economy is over heated (a period of very high level of inflation and production). The government decides to slow down the economy by decreasing public expenditures.
Explain by the use of graphs, the impact of such fiscal policy on aggregate output. In your explanation, describe the interaction between the Money market, IS-LM and AD-AS Model.

Consider the following demand function for game consoles: (D): P = 400 - 20Q
1. Assume that the price decreases from 150$ to 100$.
a. Calculate the price elasticity of demand.
b. Is the demand elastic, inelastic or unit elastic?
c. What happens to Total Revenue?


2. Assume that the price decreases from 75$ to 50$.
a. Calculate the price elasticity of demand.
b. Is the demand elastic, inelastic or unit elastic?
c. What happens to Total Revenue?