Economics

Econ 202: Principles of Macroeconomics

1) Consider the following open-economy:

C = 1000 + 0:8YD

I = 500

G = 400

T = 300

EX = 400

IM = 0:05YD

A. Compute the equilibrium output in this economy.

B. What is the marginal propensity to save in this economy? How about the marginal propensity to import?

C. Compute the tax multiplier and the spending multiplier.

D. Does the balanced budget multiplier still equal one? Explain your answer algebraically, through an example, or conceptually using the multipliers in part C.

E. Suppose government spending increases by 200. What will the new equilibrium output be?

F. Consider the original parameters to the problem (given above part A.). Suppose invest- ment decreases by 100 and the government cuts taxes by 150. What is the new equilibrium output?

2) A. Briefly explain the difference between a fixed (or pegged) exchange rate and a floating exchange rate. What system does the US use with the dollar?

B. Prior to the 1940s, the US used a gold standard with regards to its currency. Briefly explain what that means.

3) Explain the concept of purchase power parity in theory. Why might an apple (for example)cost a different amount in Japan than in the United States without purchase power parity being violated?