Equilibrium income determination

1
Equilibrium income determination

• C 80.8Y,I40.1Y so investment depends on
  income as well
• Determine eq. Income by the two approaches draw
  diagrams show that starting from any income other
  then the eq income eq income is reached

2

• At eq. I S planned I planned S
• S Y-C so S -80.2Y 40.1Y
• Yeq 120
• At any income value below eq level
• Say Y0 100
• IgtS or
• AD-Cgt Y-C or ADgtY
• Excess demand
• so firms will increase output to eq value

3

• At any income value above eq level
• Say Y0 140
• IltS or
• AD-Clt Y-C or ADltY
• Insufficient demand
• so firms will cut output to eq value

4
An alternative approach
S, I
Excess planned investment
S
I
E
5
Equilibrium income determination 2

• C 80.8Y,I-200.3Y so investment depends on
  income as well
• Determine eq. Income by the two approaches draw
  diagrams
• is it possible to reach the equilibrium starting
  from any income level?

6

• At eq. I S planned I planned S
• S Y-C so S -80.2Y -200.3Y
• Yeq 120
• At any income value below eq level
• Say Y0 100
• IltS or
• AD-Clt Y-C or ADltY
• Insufficient demand
• so firms will cut output away form eq value

7

• At any income value above eq level
• Say Y0 140
• IgtS or
• AD-CgtY-C or ADgtY
• Excess demand
• so firms will increase output to eq value

8
An alternative approach
S, I
Excess planned investment
I
S
E
9
Question Midterm I 2002

• In a simple economy with no government and
  foreign trade Planned investment depends on Y I
  50 when Ylt500,I 150 when Y gt500. The
  consumption function is C 0.8Y

10

• a. Draw the investment function. (1 pnt)
• b. Draw the saving function on the same graph. (1
  pnt)
• c. What is the equilibrium income when the
  initial income level is Y0400. Briefly describe
  the adjustment mechanism using the planned
  investment equals planned saving approach (1.5
  pnt)
• d. The same question as in c) when initial income
  level Y0600 (1.5 pnt)

11
Midterm I 2001-2

• The following aggregate quantities are expressed
  in basic prices consumption expenditures C3000,
  Investment I2000, government spending G3000,
  exports X3000, imports Z1000. Indirect tax rate
  is te0.1 no indirect tax is taken from exports.
  Total wage payments is W5000. All profit is
  distributed to shareholders but 20 of the
  shareholders are foreigners. Direct tax rate is
  td0.1. Transfer payments B250, income from
  abroad IA500 (B and IA are not taxed.) Compute
  the following quantities about national income
  accounting

12

• a. GDP at basic prices (1 pnt)
• b. GDP at market prices (1 pnt)
• c. GNP at market prices (1 pnt)
• d. Government budget deficit (1 pnt)
• e. Disposable income YD (1 pnt)
• f. Savings S (1 pnt)
• g. Change in wealth of households (1 pnt)
• h. Change in wealth of firms (1 pnt)

13
midterm I 2002 modified

• In a simple economy with no government and
  foreign trade, planned investment depends on Y
  as I 50 when Ylt500, I-1500.4Y when Ygt500.
  The marginal propensity to consume is 0.8 and
  autonomous consumption is zero.

14

• a. Draw the investment and saving functions on
  the same graph (0.5 pnt)
• b. What is the equilibrium income when the
  initial income level is Y0200. Briefly describe
  the adjustment mechanism using the planned
  investment equals planned saving approach (1.5
  pnt)
• c. Answer part b) when initial income level
  Y0700 (1.5 pnt)
• d. Answer part b) when initial income level
  Y0800 (1.5 pnt)

15
Final 2002

• Consider a three sector economy cars, steel,
  tire. During the year XXXX 10 cars are produced
  with a selling price of 500 each, 40 tires are
  produced with a price of 25 each. All tires are
  purchased by car industry. Each car needs 4
  tires. In addition each car needs 200 worth of
  steel and 100 TL of wages are paid per car. Both
  tire and steel industries each purchases one car
  to be used in their production processes. 2 cars
  are unsold and left in the inventory of the car
  producer. 2000 worth of steel and 40 tires are
  produced in the year XXXX. Steel and tire
  industries pay 1000 and 500 TL of total wages
  respectively

16

• a. calculate total consumption (2 pnt)
• b. total investment (2 pnt)
• c. total inventory investment (2 pnt)
• d. total value added of this economy in the year
  XXXX (2 pnt)

17
midterm 2001

• The following aggregate quantities are expressed
  in basic prices consumption expenditures C3000,
  Investment I2000, government spending G1500,
  net exports NX500. Indirect tax rate is te0.1
  In this particular year government has a balance
  budget. Transfer payments B250, income from
  abroad IA500 (B and IA are not taxed.) Compute
  the following quantities about national income
  accounting.

18

• a. GDP at basic prices (1.5 pnt)
• b. GDP at market prices (1.5 pnt)
• c. Direct tax rate of factor income td (1.5 pnt)
• d. GNP at market prices (1.5 pnt)
• e. Disposable income YD (1.5 pnt)
• f. Savings S (1.5 pnt)

19

• Which of the following activities are included in
  GDP? Give a very short explanation sporting your
  answer.
• a. Second hand sale of a stolen car (1.5 pnt)
• b. A farmer families consumption of wheat,
  produced by themselves (1.5 pnt)