Exercise Set 11.1
COMPUTING GDP


I. Objectives


II. Data

Model Steps

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.
  1. Obtain the following: MPC = ___________, MPS = ___________. Explain.
  2. Obtain consumption as a function of income: C = __________  + _____Y.
  3. Obtain aggregate expenditure as a function of income: AE = ___________  + _____Y.
  4. Write the equation signifying equilibrium in the goods market:  ______ = ________.
  5. Obtain the equilibrium value of GDP.
  6. Compute the equilibrium values of the other endogenous variables: Disposable income = ___________, Consumption = ___________, Saving = ___________. Show your calculations.
  7. Sketch the income-expenditure diagram.
    1. Indicate the intercepts and slope of the C-line and AE-line.
    2. Indicate the eqbm values of Y and C on the graph.
  8. Suppose government spending increases. Ceteris paribus, what is the effect on GDP? Select a new value for G and calculate the new Y.
    1. Is the increase in G an expansionary policy or a contractionary policy? Explain.
    2. Using the income-expenditure diagram, show the original and new values of GDP.
  9. Is an increase in taxes an expansionary or contractionary fiscal policy? Explain. 
    1. Select a new value of T. Calculate the new GDP.
    2. 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.

Video: Solution to Section III Questions at
http://www.screencast.com/t/tBttuCKE9d