Question 1:
i. Plot the consumption function C=150+0.7Y
(use R, scilab, or a spreadsheet. The 150 refers to $150 billion).
ii. Assuming no government sector, if planned investment spending is 250 billion dollars, what is the equilibrium level of aggregate output? Explain in full sentences, and show equilibrium level of output on the graph.
iii. If businesses become more pessimistic about the profitability of investment and planned investment spending falls by 100 billion dollars, what happens to the equilibrium level of output? Explain in full sentences, and show this equilibrium level of output on the graph.
Question 2:
a)
Calculate the aggregate demand if :-
- Government taxation and spending are zero.
- Planned investment is $300 billion.
- Net imports $50 billion
- The marginal propensity to spend is 0.7.
- The autonomous consumer expenditure is $50 billion.
b)
Explain in words, what will happen to the aggregate demand according to the IS model, if the government imposes income or salary taxes amounting to $100 billion but spends all of that money on education, health and public transport. Provide your reasoning in full and apply it to part a) of this question deriving the new aggregate demand.
Question 3:
a) Corporations in the nation of Blom have plans for 5 projects as shown in the table below. A project is considered to be viable if the expected rate of return is greater than the cost of borrowing money.
Considering four different annual interest rates: 5%, 7%, 9% and 11%, plot expected investment (the total value of all projects that will proceed) as a function of the interest rate.
Draw a line of best fit through the points on your graph, and derive a linear equation to describe the relationship between interest rates and planned investment in Blom.
|
Project
|
Cost
|
Expected Annual Return
|
|
A
|
$30 billion
|
8%
|
|
B
|
$50 billion
|
6%
|
|
C
|
$20 billion
|
10%
|
|
D
|
$40 billion
|
4%
|
|
E
|
$35 billion
|
12%
|
b):
Assuming net exports of zero dollars, zero taxation, government spending of $100 billion, and a consumption function C=150+0.7Y use the relationship derived in part a) of this question to derive an IS curve for Blom. Plot the interest rate on the vertical axis, and the aggregate output on the horizontal axis.