SECTION 1: MULTIPLE CHOICE QUESTIONS
1. Based on your understanding of the aggregate expenditure model, we know with certainty that an equal and simultaneous increase in G and T will cause:
(a) an increase in output
(b) no change in output
(c) a reduction in output
(d) an increase in investment (e) a decrease in investment
For the following two questions, suppose an economy produces only milk and butter. As- sume that all production is consumed in each year, and that price and quantity data are given in the tables below.
Good Quantity Price
Milk 500 $2 Butter 2000 $1
Good Quantity Price
Milk 900 $3 Butter 3000 $2
2. (Refer to the above tables) Between Year 1 and Year 2, real GDP (based on Year 1 as a base year) grew by
(a) 58.18% (b) 158.18% (c) 160% (d) 60%
3. (Refer to the above tables) Between Year 1 and Year 2, the GDP deflator (based on Year 1 as a base year) rose
(a) 81.25% (b) 90%
(c) 190% (d) 83.33 (e) 183.33%
ECON 301: Intermediate Macro Problem Set #1 1
ECON 301: Intermediate Macro Problem Set #1 2
ECON 301: Intermediate Macro Problem Set #1 3
SECTION 2: FREE RESPONSE QUESTIONS
3. Consider the following economy.
Y=Z Z=C+I+G C = c0 + c1YDYD = Y − T
T = t0 + t1Y I = b0
G = g0
where Y is output, Z is aggregate demand, C is consumption, I is investment, G is gov- ernment spending, YD is disposable income, T is a tax function, t0 is a lump-sum tax, t1is a proportional tax on income, and I is investment. The parameter values are c0 = 1000,c1 =0.75,t0 =−600,t1 =0.2,b0 =800,andg0 =1200.
(a) Solve for an expression for equilibrium Y (i.e., keeping all algebraic symbols), then calculate equilibrium Y using the expression and the parameter values.
ECON 301: Intermediate Macro Problem Set #1 4
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