Dr. Canofari’s questions

  1. Assume an economy described by the following equations:

E º C + I + G

C = 250 + 0.4Yd

Yd = Y – T

T = 50

I = 150 + 0.2 Y

XN = 200 – 0.1 Y

G = 100

    1. Compute the government surplus or deficit.
    2. Compute the equilibrium income produced by this economic system.
    3. Compute the trade balance in equilibrium.
    4. Check the condition according which in equilibrium the investment must be equal to the level of aggregate saving.
    5. Compute tax and government expenditure multipliers. Explain the concept of multiplier.
    6. What is the effect of an increase in the propensity to consume.?In answering to the following questions let’s always consider as starting equilibrium income that computed in point b.
    7. Compute the change in the equilibrium income due to an increase in taxes of 50.
    8. Compute the change in the equilibrium income due to a decrease in government expenditure of 50.
    9. Compute the change in the equilibrium income if the policies described in point f and g are simultaneous .
    10. Compute the change in equilibrium income due to an increase in world demand of 100
  1. Using an IS-LM model, describe graphically the effects of a restrictive fiscal policy. Explain the effect of this policy on the interest rate. Why the interest rate change?
  2. How can the central bank (graphically) mitigate the effect on the GDP of the above described policy?
  3. Using an IS-LM model, describe graphically the effects of simultaneous restrictive fiscal and monetary policies.
  4. Show graphically the effect of an income increase in the money market.
  5. Derive the IS relation.