ECO102 Tutorial 06

1
- $\frac{A S}{A D}$ Economy.
- $A S = 2 P$
- $C = 20 + 0.8 (Y - 0.25 Y)$
- $I = 10$
- $G = 40$
- $N X = 10 - 0.8 P$
- Budget deficit.
- $T = 0$
- $M P I = 0$
- $A E = C + I + G + N X$
- $A E = 20 + 0.8 (Y - 0.25 Y) + 10 + 40 + 10 - 0.8 P$
- $A E = - 0.8 P + 0.6 Y + 80$
- $Y = - 0.8 P + 0.6 Y + 80$
- AD: $Y = 200.0 - 2.0 P$
- $A S = A D$
- $2 P = 200.0 - 2.0 P$
  - $P = 50.0$
- $Y = 200.0 - 2.0 P$
  - $Y = 100.0$
- Check:
  - $A S = 2 P = 2 (50) = 100.0$
  - $A D = 200 - 2 (50) = 100$
- a: The government will increase $T$ to have $b_{2} = 0$
  - $B_{0} = T + Y t - G$
  - $B_{0} = T + 0.25 Y - 40$
  - $B_{0} = 0 + 0.25 Y - 40$
  - $B_{0} = 0 + 0.25 (100) - 40 = - 15.0$
  - We need $T ↑ 15$
  - $Δ T \cdot S M \cdot M P I = R Δ T$
  - $T = 40 - 0.25 Y$
  - Make a 'Fake AE' Current $T$ :
    - $A E = C + I + G + N X$
    - $A E = 20 + 0.8 (Y - 0.25 Y - (40 - 0.25 Y)) + 10 + 40 + 10 - 0.8 P$
    - $A E = - 0.8 P + 0.8 Y + 48.0$
    - $Y = - 0.8 P + 0.8 Y + 48$
    - $Y = 240.0 - 4.0 P$
    - Since $A S = 2 P$
    - $Y = 2 P$
    - $P = \frac{Y}{2}$
    - $Y = 240.0 - 4.0 \frac{Y}{2}$
    - $Y = 80.0$
    - $P = \frac{Y}{2} = \frac{80}{2} = 40$
    - Check:
      - $A S = 2 P = 2 (40) = 80.0$
      - $A D = 240 - 4 (40) = 80.0$
    - $T = 40 - 0.25 (80) = 20.0$
    - $T ↑ 20$ to effect a $B ↑ 15 ⟹ B_{2} = 0$
  - New AE
    - $A E = 20 + 0.8 (Y - 0.25 Y - 20) + 10 + 40 + 10 - 0.8 P$
    - $A E = - 0.8 P + 0.6 Y + 64.0$
    - $Y = - 0.8 P + 0.6 Y + 64.0$
    - $Y = 160.0 - 2.0 P$
    - $A D = A S$
    - $2 P = 160 - 2 P$
    - $P = 40$
    - $Y = 160 - (2) (40) = 80$
    - Check:
      - $A S = 2 P = 2 (40) = 80.0$
      - $A D = 160 - 2 (40) = 80.0$
  - Bundle B:
    - #tk how to get this?
    - Seeing the effects of real gdp with everything else constant.
- b: Suppose we change $G$
  - #tk
  - We had a $- 15$ in budget
  - Now we need to have $G ↓ 15$ to have $b_{2} = 0$
  - $15 = Δ T + 0.25 Δ Y - Δ G$
  - $\dots$
2
- Short run $\frac{A S}{A D}$ economy. $S M = 2$ . $t = 0.2$
- $B = - 60$
- It can be eliminated by changing $G ↓ x$
- $B_{0} = - 60$
- $Δ Y = S M \cdot Δ G$
- $B = T + Y t - G$
- $Δ B = Δ T + 0.2 Δ Y - Δ G$
- $60 = 0 + 0.2 Δ Y - Δ G$
- $60 = 0 + 0.2 (2 Δ G) - Δ G$
- $60 = 0 + 0.4 Δ G - Δ G$
- $Δ G = - 100.0$