Macroeconomics, Econ 2113

Name: Leung Choi Fan  Student ID: 20436293  Instructor: Fei DING

Problem Set 1

Macroeconomics, ECON 2113

Part I:

1. False. In order to survive, consumption is needed (must be larger than zero) to purchase some life necessity such as water and foods. Even if disposable income is zero, a person may still have assets including stocks and bonds at hand allowing them to sell them and consume other daily necessity products. Moreover, they can borrow money from government or financial institutions to consume.

2. True. G and T are exogenous variables because no reliable rule to describe government behavior; want to study implication of fiscal policy on the economy. So, the multiplier is always greater than 1 because c1 is less than one and so (1-c1) is also less than one. Any changes in autonomous spending will change the output by more than one for one effect.

3. False. As people attempt to save more, the result is a decline in output. This decline of output then reduces how much people can save. So, as we try to save more, the result is unchanged saving in the short run. Investment does not change nor T or G, and then S cannot change.

4. Uncertain. This depends on the elasticity of demand and investment.

Part II:

1.a

2.a

3.a

4.d

Part III:

1.

2. The growth rate of real GDP:

  - For 2001: (20000000-18000000)/18000000=11.1%

  - For 2002: (22000000-20000000)/20000000=10%

3. The growth rate of real GDP:

  - For 2001: (2000000-1800000)/1800000=11.1%

  - For 2002: (22000000-20000000)/20000000=10%

4. For 2001: (25300000/22000000) x100=115; inflation rate = 9.5%

  For 2002: (21000000/20000000) x100=105; inflation rate = 5%

5. The inflation rate for HKUST in the year of 2010=10%-4%=6%.

Part IV:

1.

(1) Y= 160+0.6(Y-100)+150+150, Y=1000

(2) YD= Y-T=1000-100=900

(3) C=160+0.6(900)=700

(4) MPC=0.6

(5) MPS=1-0.6=0.4

(6) Multiplier = 1/(1-c1)=1/(1-0.6)=1/0.4=2.5

   Autonomous spending = c0+I+G-c1T=160+150+150-0.6x100=400

(7) Private saving= 900-(160+0.6x900)=200

   Public saving = 100-150=-50

2.

(1) Z=700+150+150=1000. Yes.

(2) Y=160+0.6(Y-100)+150+110

   0.4Y=360

   Y=900

   Z= 160+0.6(900-100)+150+110=900. Yes, the total demand is equal to production.

(3) YD= 900-100=800

   C=160+0.6(800)=640

   Private savings=800-640=160

   Public savings=100-110=-10

   Investment includes private and public savings, as it is the money that spent on purchasing capital goods.

3.

(1) C=c0+c1 (Y-T)

  T=t0+t1Y

  G, I constant

  Y=C+I+G=c0+c1 [Y-(t0+t1Y)]+I+G=c0+c1Y-c1t0-c1t1Y+I+G

  (1-c1+c1t1)Y= c0-c1t0+I+G