Exercise
Set 11.1
COMPUTING GDP
I. Objectives
- To obtain aggregate
expenditure
- To compute equilibrium GDP
- To understand the reasons
for changes in the economy's output
- To use the
income-expenditure diagram
II. Data
Model
- Consumption: C = a + b(DI),
where C
is consumption and DI
is disposable income. [Recall
that DI
= Y - T.]
- Investment (I),
Government
expenditure (G),
Net Exports (X-IM),
and Taxes (T)
are exogenous.
Steps
- Select the values of the
parameters a
and b.
- Select values for
the
exogenous variables (I, G, X-IM
and T).
- Solve for equilibrium values
of GDP (or Y), DI, C
and S.
[Note: S
is private saving.]
- Click on Gimme
GDP!
to confirm your results.
III. Questions
Let a
= 8000, b
= 0.8. Further, assume that
investment is 480, government spending
is 300, net exports is -200, and taxes are 400.
Use these numbers to answer the following questions.
- Obtain the following: MPC =
___________, MPS = ___________.
Explain.
- Obtain consumption as a
function of income: C = __________
+ _____Y.
- Obtain aggregate expenditure
as a function of income: AE =
___________
+ _____Y.
- Write the equation
signifying equilibrium in the goods
market: ______ = ________.
- Obtain the equilibrium value
of GDP.
- Compute the equilibrium
values of the other endogenous
variables: Disposable income = ___________, Consumption =
___________, Saving =
___________. Show
your calculations.
- Sketch
the
income-expenditure diagram.
- Indicate the intercepts
and slope of the C-line and AE-line.
- Indicate the eqbm values
of Y
and C
on the graph.
- Suppose government spending
increases. Ceteris
paribus,
what is the effect on GDP? Select a new
value for G
and calculate the new Y.
- Is the increase
in G
an expansionary policy or a contractionary policy? Explain.
- Using the
income-expenditure diagram, show the original and new values
of GDP.
- Is an increase in taxes an
expansionary or contractionary fiscal policy?
Explain.
- Select a new value of T.
Calculate the new GDP.
- Provide a sketch.
- Does an increase in foreign
GDP lead to an increase in our
GDP? Use changes in (X-IM)
to
explain. Provide a sketch.
- The Paradox
of Thrift describes a situation
where increased saving by households results in lower GDP. In this
model, the heightened desire to save is captured by a decrease in a
in the consumption function. Do we observe the Paradox
of Thrift in the model? Explain.
Provide a sketch.
Video:
Solution to Section III
Questions at
http://www.screencast.com/t/tBttuCKE9d