MB 2104 ECONOMICS

TUTORIAL WEEK 11

1. You are given the following information about the economy:

Income Expenditure
0 100
500 500
1,000 900
2,000 1,700
3,000 2,500
4,000 3,300
a. What is the level of autonomous expenditures?
b. What is the marginal propensity to expend? Explain why it is important!
c. What expenditures function (an equation) corresponds to the table?

2. Given the following equation, answer the questions: AE=C0+.6Y+ G0+I0+(X0-M0) where
C0=1,000, I0=500, G0=300, X0=300, M0=400.
a. Draw the aggregate expenditure curve!
b. What is the slope of the curve?
c. What is the vertical axis intercept?
d. Add the aggregate production curve on the graph.
e. What is the multiplier?
f. What is the equilibrium income? Label that point A on the graph!

3. Suppose the mpe is 0.8 and autonomous expenditure and income are currently 200 and 1400.

Change in Suppose, next year Autonomous expenditure

Change in Induced decrease $80.
Round Income Spending
1 _____ _____ a. Fill in the table to show the changes in income
2 _____ _____ and induced spending as the economy
approaches equilibrium during the first 7
3 _____ _____ rounds of adjustment.
4 _____ _____
5 _____ _____ b. What is the total expected change in income?
6 _____ _____
7 _____ _____
c. Is income rising or falling?
4. The Fed wants to change the reserve requirement in order to change the money supply (MS and
MM currently is $3,000 and 3 respectively). For each situation below, calculate the current reserve
requirement and the amount by which the Fed must change the reserve requirement to achieve
the desired change in the money supply. Assume no cash holdings.