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Economics 100.1
Instructions: Answer the following questions. Show your solution for relevant items.
1. Consider a closed economy with households, firms and government which imposes a lumpsum tax to
households. The consumption function in the economy is given by 𝐶 = 250 + .85𝑌𝑑 , (in billion pesos)
where 𝑌𝑑 is the households’ disposable income. Government expenditure is at Php 119.5 billion while
investment is at 70 billion.
E. What is the equilibrium output when the marginal propensity to consume increased to .90? Is
it higher or lower than your answer in (B)?
F. Using the original model (i.e where 𝐶 = 250 + .85𝑌𝑑 ), by how much will the equilibrium
output increase if investment increases to 100 billion? Show your solution.
2. Given the following values (in billions of Pesos), compute for the missing values and determine
whether output will tend to contract, expand, or be in equilibrium.