Name: _______________________

ECO 200-810 Principles of Macroeconomics Spring 2001 Homework #4 due 3/30

  1. Consider the following model of the economy:
    2. Consumption function: C = 6000 + .8(Y-T)

    Investment function: I = 12,000

    		 Government spending: G = 17,000

    Net Exports: NX = -500

    Taxes: T = 15,000
    1. Calculate the equilibrium level of output/income in the economy. (Hint: remember to fill in taxes in the consumption function!)

      2.  

       
       
       
       
       
       
       
       
       
       
       
       
       
       

    2. Determine the value of the government spending multiplier and the tax multiplier.

      3.  

       
       
       
       
       
       
       
       
       
       

    3. Suppose the government is considering two proposals to balance the budget:
      1. increase T until T=G, OR
      2. decrease G until T=G
    Which policy will have a smaller impact on output? Explain your answer.
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
  2. You are given the following simplified T-account for a bank:
Assets
Liabilities
Reserves $200

Loans $1000

 Deposits $1200
The required reserve ratio is 5 percent.
    1. How much is the bank required to hold as reserves, given its deposits of $1200?

      2.  

       
       
       
       
       
       
       
       

    2. How much are its excess reserves?

      3.  

       
       
       
       
       
       
       
       

    3. Suppose a depositor comes in and deposits $100 in cash. Show the banks new balance sheet below. Now how much are excess reserves?

      4.  

       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       

    4. Calculate the money multiplier

      5.  

       
       
       
       
       
       
       
       

    5. Consider the $100 deposit made in (c). How much in new deposits can be created from this $100 deposit?

 
 
 
 
 
 
 
 
 
 
  1. Use the diagram below to answer the following questions:


    2. Ye is equilibrium output, while Yf is full employment output

    1. Describe the condition of the economy above.

      2.  

       
       
       
       
       
       
       
       
       
       

    2. Describe the appropriate fiscal policy in this situation. Show the impact on the graph above.