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UP School of Economics

Economics 100.1

Due: Tuesday, September 17, 2019

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.

A. Calculate the multiplier.

B. What is the equilibrium output? Show your solution.

C. How much is the disposable income at equilibrium? Show your solution.

D. How much is the total household consumption? Show your solution.

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.

Levels Planned Planned Planned Total planned Resulting


of consumption saving investment consumption tendency
GDP and investment (Total of
and DI Expenditure) output
3500 2800 600
2200 550 600
3000 2400 600
4000 3200 600
3150 630 600

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