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ECON 1002 – INTRODUCTION TO MACROECONOMICS

TUTORIAL SHEET #2

1. (a) What assumptions are implicit in the definition of aggregate expenditure?

(b) Using the AE framework, show how equilibrium national income is determined.
(Note: this can be done both diagrammatically and mathematically).

(c) Investment spending can be disaggregated into 3 parts: briefly explain how changes in
the ‘opportunity cost’ affect the desired spending of each part. (Hint: See “Desired
Investment Spending” in textbook)

* (d) Using your diagram from (b), show and explain the likely impact on equilibrium
national income of each of the following;
(i) a fall in investment
(ii) an increase in government spending
(iii) an increase in the tax rate
(iv) an increase in the marginal propensity to consume

2. a) Draw a net export function. What assumptions did you make? Identify the marginal
propensity to import (mpi) on your drawing.

(b) Draw a public savings function. What assumptions did you make? Identify the tax
rate on your drawing. Also identify the level of national income at which the
government’s budget is balanced.

* (c) Use the concepts of leakages and injections to show the condition under which
national savings will be equal to national asset formation. Illustrate with a diagram.

*3. For an economy with a tax rate of 10%, the following is given:

C = 60 + 0.8YD
G = 400
I = 140
NX = 10 - 0.20Y

(I) If the economy produces $1 of extra output, how much of it is;

(a). spent on domestic goods?

(b). import expenditure?
(c). saved?

(II)

(a). Compute the multiplier.

(b). Calculate the equilibrium level of national income?
(c). What is the value of consumption expenditure in equilibrium?
(d). Assume all taxes are collected. Is the Government experiencing a budget deficit in
equilibrium? Why?
(e). Is the economy experiencing a trade deficit? Why?
(f) What is the value of national asset formation when GDP is in equilibrium?
(g) If government increases its spending by 25%, what would be the equilibrium level of
national income when all spending rounds are exhausted?
(h). Assume that these results referred to the economy your country. Briefly discuss the
implications of each of the results for your country’s economy.

February, 2018