SECTION B
[80 MARKS]
QUESTION 1
[14 MARKS]
Given the information in the following tables, fill the blanks (assuming that the
consumption function is linear with respect to disposable income). Find the tax
function, consumption function with respect to disposable income, the consumption
function with respect to output, the savings function with respect to disposable income,
and the savings function with respect to output, please note that Progressive Taxes:
Y
T
Y-T
Cc
Ss
0
-20
110
100
0
200
80
Taxes are a function of income (i.e. T = c + dY)
a) Fill the gap in the table above
b) Consumption Function with respect to Y
c) Savings Function w/ respect to Y
d) What is the level of Output for this economy
QUESTION 2
150
390
(0.5 *16 = 8 Marks)
(2 Marks)
(2 Marks)
(2 Marks)
[44 MARKS]
Consider the economy with the following information about goods and money
market:
Cd = 200 + 0.5Y — 500r
Id = 200 - 500r
(M/P)d= 0.5Y — 250r
G = 150
M = 4900
Y = 1000
a) What are the general equilibrium levels of the real interest rate r, the price level
P, desired aggregate consumption Cd, and desired investment Id? ( keep the
answers to 2 decimal places) (20 Marks)
b) Suppose that the majority of economic activity in this economy is bread making.
Because wheat plantations received good rain this year, let us imagine that the
weather this year is unusually conducive to growing wheat. In the IS-LM
framework, this situation represents a beneficial supply shock. Specifically,
suppose the full-employment level of output Y1 increases temporarily to Y2 =
1050. Show what happens to the economy in a graph. What will be the new
short-run equilibrium value of r and how will the new general equilibrium come
i]es se so