Macroeconomics and Money
Economics 736
Business Conditions Analysis
Kashian
Quiz #1- Spring 2006 1. Suppose that the economy is characterized by the following equations: C = 160 + 0.6 Yd I = 150 G =150 T = 100
a. Solve for GDP (Y) Y = C+I+G Y=160+0.6(Y-100)+150+150 Y = 400 + 0.6Y Y = 1000 b. Disposable Income (Yd) 900 = Y - T c. Consumption Spending C = 160 + 540 = 700 d. If output is equal to 900, calculate total demand. Are we at equilibrium No, AD = 1000 e. If output is equal to 1000, calculate private savings. Is this equal to Investment? Private Savings = Y – C - T f. Calculate the marginal propensity to consume? g. What is autonomous consumption?
2. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000. Her money demand function is given by M = $Y(.35 –i) a. What is her demand for money and her demand for bonds when the interest rate is 5% and 10%?
Interest rate at 5%
M = 60,000 (.35 - .05)
M = 18000 Demand for bonds = Wealth - Md Db = 50000 – 18000 Db = 32000
Interest rate at 10%
M = 60,000 (.35 - .1) M = 15000
Demand for bonds = Wealth - Md Db = 50000 – 15000 Db = 35000
b. Suppose that the interest rate is 10%. In percentage terms, what happens to her demand for money if her yearly income is reduced by 50%?
M = $Y(.35 – i) M = 30000 (.35 -.1) M = 7500
Demand for
Business Conditions Analysis
Kashian
Quiz #1- Spring 2006 1. Suppose that the economy is characterized by the following equations: C = 160 + 0.6 Yd I = 150 G =150 T = 100
a. Solve for GDP (Y) Y = C+I+G Y=160+0.6(Y-100)+150+150 Y = 400 + 0.6Y Y = 1000 b. Disposable Income (Yd) 900 = Y - T c. Consumption Spending C = 160 + 540 = 700 d. If output is equal to 900, calculate total demand. Are we at equilibrium No, AD = 1000 e. If output is equal to 1000, calculate private savings. Is this equal to Investment? Private Savings = Y – C - T f. Calculate the marginal propensity to consume? g. What is autonomous consumption?
2. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000. Her money demand function is given by M = $Y(.35 –i) a. What is her demand for money and her demand for bonds when the interest rate is 5% and 10%?
Interest rate at 5%
M = 60,000 (.35 - .05)
M = 18000 Demand for bonds = Wealth - Md Db = 50000 – 18000 Db = 32000
Interest rate at 10%
M = 60,000 (.35 - .1) M = 15000
Demand for bonds = Wealth - Md Db = 50000 – 15000 Db = 35000
b. Suppose that the interest rate is 10%. In percentage terms, what happens to her demand for money if her yearly income is reduced by 50%?
M = $Y(.35 – i) M = 30000 (.35 -.1) M = 7500
Demand for