MONTEGO BAY COMMUNITY COLLEGE BACHELOR OF BUSINESS ADMINISTRATION ECON3701 PROBLEM SET 2 1. Use the following information about the aggregate levels of spending and output/income in a particular economy to answer the questions below. Total C I Output/Income ( Y) 645 80 700 80 800 720 900 795 80 80 1000 870 80 1100 945 a. Derive the consumption function. (Hint: After you have found the slope, use any pair of values of Y and C to determine the autonomous level of household spending.) (5 marks) b. What is the equilibrium level of income ( 5 marks) c. Find the size of the Multiplier (3 marks) 2. Consider the following numerical version of the Keynesian model with a government C = 100 + 0.8 Yd I = 150 G = 200 T = 200 a. Using the equilibrium condition Y = C + I +G, solve for the value of the equilibrium output. Yd = Y - T.(5 marks) b. Suppose that, in order to maintain a balanced budget, the government increased net taxes by 50 when it increased government spending on final goods and services by 50. Calculate the change in the equilibrium level of output caused by the equal increase in G and T (5 marks) 3. Assume the following prevails in Pleasantville: Y = C+I+G C = 500 +0.8(Y - T) I = 300 G = 700 T =0.25Y a. The marginal propensity to consume (3 marks) b. Calculate the equilibrium level of national income using the income -expenditure approach and the leakage injection approach (6 marks) c. Determine the size of the multiplier (3 marks) d. Draw a well labelled income-expenditure diagram to show this equilibrium (5 marks) THE END