Homework 8
Principles of Economics
Name________________________________ Date___________________________________
Present your homework to Tomislav Herceg before Midterm 2. It is necessary to consign all your
homeworks in order to be able to take the midterms and the final.
Homework is an individual task for every student. Its intention is to provoke continuous work in order to reach better
comprehension. Hence it is futile, immoral and illegal to GIVE YOUR HOMEWORK TO OTHER STUDENTS and to COPY HOMEWORKS
AND PRESENT IT AS YOURS. Every misconduct in this sense will be considered as a violation of academic ethics AND WILL BE
PROSECUTED.
1. Marginal propensity to consume is 0.6, autonomous consumption is 20, investment is I = 10 and
government spending is 15.
a) Express consumption and savings function and draw them on two graphs along with investment
and government spending PRECISELY (use ruler).
b) Find the equilibrium output.
c) Calculate tax, government spending and investment multiplier.
d) What would happen with the equilibrium output and multipliers if MPC were 0.8? Draw this
graph.
2. Consumption function of an economy is C = 100 + 0.7Y. If government spending falls by 10 as well as
taxes and if investments rise by 15 find change in GDP.
3. Required reserve rate is 20%. A client deposits 10000 kn on her bank account. Fill the table below and
calculate loan and money-supply multiplier.
Bank
1
2
3
Total
Deposit
Reserve
Loans
4. Cash in circulation is 100 Bill. HRK, required reserves are 30 Bill. HRK, current account deposits are 300
Bill. HRK, 7 Bill. HRK in mutual funds. What is the amount of M1 and M2?
5. Explain the concept of fiat money.
6. Ronald Reagan decresed government spending and taxes during the 80's in the USA. However, the oil
shock caused AS contraction (potential output fell down). Show what happened with USA economy using
AS-AD model.