Economics

'J)o aUtuxoa-/ q,rr"*{fAsl4 #S- CHAPTER 12 Spending by lndividuals, Firms, and Governments on Real Goods and Services 359 f-,LI

Given the following variables in the open econ- omy aggregate expenditure model, autonomous consumption (Co) * 2A0, autonomous invest- ment (16) = 200, government spending (Gd = 100, export spending (Xo) = 100, autonomous import spending (Mil = 100, taxes (Tp) = 0, marginal pro. penstty to consume (cJ = 0.8, marginal propen- sity to invest (iJ = 0"1, and marginal propensity to import @nt) = 0-15,

a Calculate the equilibrium level of income for the open economy aggregate expenditure model.

b. If there is an increase in autonomous import expenditure from 100 to 200 resulting from arr increase in the currency exchange rate, calcu- late the new equilibrium level of income and the value of the multiplier.

c. Compared with the original equilibrium in part a, if the goyernrnent decides to impose taxes {Tp) of 100, ca}culate the new equilibrium level of income.

ffi Application Questions 1. [Jse the aggregate expenditure model developed in

this chapter to explain the following statements: a Coming amid continued turmoil in the finan-

cial and credit markets, the report sent stocks lower, with the Dow Jones Industrial Average fatling 146.70 points F?idayto close at 11,899.69.

b. Administration offlcials said they were confi- dent conditions would improve as tax rebates that are part of the recent $152 billion economic- stimulus package begin to reach consumers.

c. The Fed is expected to cut interest rates again to prop up the economy.

2. Redraw Figures l2.11aand 12.11b to illustrate the effects on the resulting equilitrrium level of income trom ea,ch of the following changes: a A greater sensitivity of interest-related con-

sumption and investment expenditure to changes in the interest rate.

b. A larger multiplier in the aggregate expenditure model.

Hint: Remember that consumption has an auton- omous component and is a firnction of dispos- able income, Iz4, where Ya= Y - Tp.

the consumption ion is given by C = 800 + 0.8 {Y - T1), that nt (1) equals 200, and that government (G) and taxes (7p)

or export spending.

a. Calculate the equilibrium lncome. b. If government purchases crease by 100

(all else held constant), the new equi- librium level of ue of the multiplier.

c. Compared with government nditure (G) and Qp)

so that the government budget remalns anced, does the equilibrium level

remain unchanged? Explain your

"r'';+ 3. Go to the Web site of the Conference Board

(www.conference-board.org) and find the latest release of the Consumer Confidence Index. I{ow has the index changed since its last release? What is the expected impact of this change on the economy?

4. A number of articles in the Watl Street Jou,mraL reported that the strong dollar, combined with the recession of 2001, fbrced many U.S. manu- facturers to develop better methods to produce and sell their products. Usc the discussion of the nlacro model in this chaptcr to explain why busi- nesses would have implemented such changes in strategies.

5. What were the key provisions of the American Recovery and Reinvestment Act passed by Congress in February 2009? How has the impact of the Act been evaiuated?

6. Compare and contrast current U.S. economic activity with that described in the opening case of this chapter.

Economics for Managers, Third Edition, by Paul G. Famham. Published by Prentice Hall. Copyright O 2014 by pearson Education, Inc.

each equai 200.