Exercise Set 10
COMPUTING GDP


I. Objectives


II. Data

Assumptions

Steps

a: b: T: I: G: X-IM:


Equilibrium values

Y: DI: C: S:

III. Questions

  1. Assume particular values for the parameters of the consumption function:

  2. Why should b lie between 0 and 1?

  3. Based on your numbers: MPC = ___________       MPS = ___________. Explain.

  4. Assume particular values for the exogenous variables:

  5. Compute the equilibrium values of the endogenous variables (show your calculations):

    GDP = ___________     Disposable income = ___________     Consumption = ___________     Saving = ___________

  6. Sketch the income-expenditure diagram.

  7. Suppose the marginal propensity to consume increases by 20%.

  8. Is an increase in G expansionary? Explain. Provide a sketch.

  9. Is an increase in taxes a contractionary fiscal policy? Explain. Provide a sketch.

  10. Does an increase in foreign GDP lead to an increase in our GDP? Use changes in (X-IM) to explain. Provide a sketch.

  11. 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.


EC101 home