ECON 1P91 Midterm: Midterm copy 9

Suppose the initial conditions of the economy are characterized by the following equations in a standard font. We then shock the economy as shown in the italics font.

1) C = a₀ + a₁ (Y-T) + a₂ (WSM) + a₃ (WRE) + a₄ (CC) +a₅ (r)

1^') C = a₀ + a₁ (Y-200) + a₂ (10,000) + a₃ (15,000) + a₄ (120) +a₅ (4)

1'') C = a₀ + a₁ (Y-200) + a₂ (12,000) + a₃ (15,000) + a₄ (160) +a₅ (4)

2) I = b₀ + b₁AS + b₂CF + b₃ (r)

2') I = b₀ + b₁(140) + b₂(1,500) + b₃ (4)

2'') I = b₀ + b₁(140) + b₂(1,500) + b₃ (4)

3) G = G

3') G = 200

4) X-M = X-M

4') X-M = -200

4'') X-M = -400

5) AE = C + I + G + X-M

Where: a₀ = 50 a₁ = .60 a₂ = .05 a₃ = .10 a₄ = .5 a₅ = -400 b₀ = 100 b₁ = .5 b₂ = .2 b₃ = -50

Use the initial Conditions above to get expressions for the Consumption Function, Investment and the AE equation.

A) Complete the consumption function: C = ________+________Y

B) What is the value of Investment: I = _________

C) Fill in the intercept and slope values to correctly complete the AE equation:

AE = ________+________Y

D) The value of equilibrium output (Y) = _________

E) The value of equilibrium consumption (C) = ________

We now incur shocks ot the economy as provided in the italics font. Use these new conditions to get expressions for the Consumption Function, Investment and the AE equation.

F) Complete the new consumption function C = _______+______Y

G) What is trhe new value of Invesment: I = ________

H) Fill in th eintercept and slope values to correctly complete the new AE equation:

AE = _______+________Y

I) The new value of equilibrium output (Y) = ______

J) The new value of equilibrium consumption (C) = _______

Suppose that the are two goods in the economy, Xylophones (X) and Yams (Y). In year t, consumers in the economy purchase 20 Xylophones at a price of $20 each and 100 Yams at a price of $2 each. In year t + 1, consumers in the economy purchase 18 Xylophones at a price of $30 each and 150 Yams at a price of $2.50 each.

1. Calculate the GDP deflator in years t and t + 1 with base year t. What is inflation according to this deflator? Show each step. (Hint: it will be helpful for you to first calculate nominal and real GDP in years t and t + 1. When you calculate real GDP, make sure that you use the appropriate base year).

2. Calculate the GDP deflator in years t and t + 1 with base year t + 1. What is inflation according to this deflator? Show each step. (Hint: you will need to calculate real GDP in years t and t + 1 using a different base year than you used in part 1. Once you calculate real GDP with the appropriate base year, you will follow the same steps that you did in part 1.)

3. Compare your answers to a and b above. Are they the same? If not, why not? How does chain-weighting address any potential difference?

4. Calculate the CPI in years t and t + 1, using year t as the base year.

5. Describe two ways in which the CPI differs from the GDP deflator.

6. There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

In the country of Utopia, the structure of the economy is described as the following:

Y = C + I + G + (X – M)

C = C0 + (mpc)(DI)

I = I0 + (mpi)(Y)

M = M0 + (mpm)(DI)

DI = Y – T

T = (t)(Y)

Where Y is the level of real GDP in the economy, DI denotes the disposable income in the economy, C represents the level of consumption in the economy, C0 is the autonomous consumption level, mpc denotes the marginal propensity to consume, I is the level of investment in the economy, I0 characterizes the autonomous investment, mpi is the marginal propensity to invest, G characterizes the level of government expenditure, X is the level of export from the country, M represents the amount of import in the country, M0 is the level of autonomous import, mpm denotes the marginal propensity to import, T is the amount of tax imposed in the country, and t represents the average tax rate in the economy.

After extensive research, the economists in Utopia believe that the following values (all the dollar values are in number of millions) can be assigned to the structure of the economy, C0 = $500; mpc = 0.8; I0 = $200; mpi = 0.2; G = $400; X = $300; M0 = $100; mpm = 0.1; and t = 0.25. The Utopian economists further believe that the level of potential GDP in the country is $4,000.

Questions:

1. What is the demand side equilibrium level of real GDP in the country? Please show your calculations.

2. Is the overall Utopian economy in equilibrium? Elaborate your answer.

3. If the economy is not in equilibrium, what will happen eventually? Explain your answer.

4. What is the value of the overall multiplier? Please show your calculations and explain the value.

The country of Utopia is probably experiencing a recessionary pressure in its economy now. The economists are suspecting that, since the latest estimates of mpc, mpi, and mpm indicate that their estimated values have gone down to 0.65, 0.15, and 0.05 respectively.

5. What is the demand side equilibrium level of real GDP in the country now? Please show your calculations.

6. Is the overall Utopian economy now in equilibrium? Elaborate your answer.

7. If the economy is not in equilibrium now, what will happen eventually? Explain your answer.

8. What is the adjusted value of the overall multiplier? Please show your calculations and explain the value.