ECON 201
Exercise Problems: Sessions 1-3
1. Consider the following information:
𝐶𝐶̅ = 250
𝐼𝐼 ̅ = 200
𝐺𝐺̅ = 150
𝑚𝑚𝑚𝑚𝑚𝑚 = 0.4
(a) Calculate the level of consumption at equilibrium.
(b) Calculate the level of savings at equilibrium.
(c) Calculate the amount of unplanned inventory at an output level of 200.
(d) If government expenditure increases (in an effort to mitigate the effects of the COVID-19
pandemic) to 250 and investment increases to 250, calculate the change in equilibrium
income.
(e) If the mps were 0.5 instead, by how much would equilibrium income change, given the
changes in (d) above?
(f) If the government wished to raise the equilibrium level of income by 6000, by how much
should they raise government expenditure (mps=0.4)?
2. Consider the following information:
(a)
(b)
(c)
(d)
(e)
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𝑇𝑇𝑇𝑇 = 200
𝐶𝐶̅ = 600
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𝑇𝑇𝑇𝑇 = 50
𝑚𝑚𝑚𝑚𝑚𝑚 = 0.8
𝐺𝐺̅ = 300
𝐼𝐼 ̅ = 400
What is the equation for the consumption function?
Calculate the multiplier.
Explain what is meant by the term ‘the multiplier’.
Calculate the level of consumption at equilibrium.
Draw the consumption function and aggregate demand function (include 45 degree
line). Make sure to label the level of equilibrium income and the vertical intercepts of
the consumption and aggregate demand functions.
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