Economics 1P92

Practice Problems 1
Name:
Student Number:
Tutorial Number:
This problem set is designed to aid students in preparation for their second midterm. The problem set is
to be handed in on March 12, 2014 at Plaza 420 by 4pm. Late assignments will not be accepted.
1. The following information is given for the economy of Thorold.
C=100+0.7Yd
I=250
G=250
X=300
M=0.13Y
T=0.1Y
(a). Please find the equation for the aggregate expenditure line in the economy of Thorold. (5 marks)
(b). What is the equilibrium level of GDP in the economy of Thorold. (2 marks)
(c). Suppose that investment in the economy of Thorold decreased to 150. What is the change in the
level of GDP? (3 marks)
2. The economy of Thorold is currently in long-run equilibrium. (Please draw separate graphs for each
part of the question)
(a). Please illustrate the long-run equilibrium on an aggregate supply and aggregate demand diagram. (2
marks)
(b). In the economy of Thorold, beer is the leading export. Due to an increase in national income in
Thorolds main trading partner St. Catharines, there is increased demand for beer. Illustrate the increase
in exports on a separate aggregate supply and aggregate demand diagram. Please indicate the new level
of GDP and the new price level. (3 marks)
(c). Describe the economy at this new equilibrium. (hint: is there an inflationary gap or recessionary gap,
is unemployment above or below the natural rate) (2 marks)
(d). Is the economy stable at this new equilibrium? If yes, please explain. If no, please illustrate on the
graph and in writing the adjustment process back to long-rum equilibrium. (3 marks)