Question No.

1
Part A
Y=C+I+G+X-IM
As per given data
C = 49 + 0.9DI
I= 300 2,000r
G=800
T = 10 + 1/3Y
X-IM = 60
D.I = Y T
R = 0.05
Adding all these values into the above equation:
Y = 49 + 0.9 (Y-10-1/3Y) + 300 - 2,000 (0.05) + 800 + 60
Then,
Y 0.9Y + 0.9/3Y = 1,100
Y = 2,750
GDP equilibrium is 2,750
Part B
We know that
Deficit or Surplus = Government Income Expenditure by Government
In other words,
Deficit or Surplus = T G
= 1,010 800
Surplus
= 210

a) According to all the findings If government reduces the tax rate from 1/3 to 0.20 and at the
same time the Federal government raises the interest rate from 0.05 to 0.06 then GDP will
change by 1,107.
In this case the new equilibrium point will be,
Y = 49 + 0.9 (Y-10-0.2Y) + 300 - 2,000 (0.06) + 800 + 60
Y = 1189 +0.9Y-9-0.18Y
0.28Y = 1,080
Y = 3,857
b) In second situation If exports of the country decrease by 20 and interest rate decreases to 0.04
Then it will have no effect on GDP because as exports decreases by 20, the investment will be
increased by 20.

Question No. 2
Part A
Y=C+I+G+X-IM
Equation 1
Calculating consumption,
C = 300 + 0.75DI
Where DI = Y T
I= 600 1,000r
G=300
T=0
X-IM = 100
D.I = Y T
R = 0.10
Now adding all these values of consumption, taxes and government spending into Equation 1
Y = 300 + 0.75(Y-0) + 600 1,000(.1) + 300 +100
Y-0.75Y = 1,200
Y = 4,800
The equilibrium level of income is at 4,800.
Part B
If rate of interest changes then it will change Y by 200
0.25Y = 1,200+100-100*.15
Y = 4,600
Part C
If Government raises the taxes by 300 and rate decreases to 0.05 then Y will be equal to 4,100.
Y = 300 + 0.75(Y-300) + 600 1,000(.05) + 300 +100
0.25Y = 1,025
Y = 4,100

Question No. 4
Part A
Par Value = 1,000
Sale price = 925
Interest = Par Sale Price
Interest = 1,000-925=75
We know that,
Interest rate = Interest Amount/Sale Price
r = 75/925 = 0.081
r = 8.1%

Part B
Par Value = 1,000
Sale price = 975
Interest = Par Sale Price
Interest = 1,000-975=25
Interest rate = Interest Amount/Sale Price
r = 25/975 = 0.0256
r = 2.56%
As the sale increase from 925 to 975 then the interest rate decreases from 8.1% to 2.56%
Part C
In terms of price the formula is
R = (1,000 P)/P

Question No. 8
We know that
Y=C+I+G+X-IM
C = 300 + 0.75DI
1= 1,000 100r
G=0
T=0
X-IM = 0
D.I = Y T
Part A
R = 0.02
From the above equation,
Y = 300 + 0.75Y + 1,000 100(0.02)
Solving Above equation
0.25Y = 1,298
Y = 5,192
So, GDP equilibrium is at 5,192.
Part B
R = 0.05
Y = 300 + 0.75Y + 1,000 100(0.05)
Solving Above equation
0.25Y = 1,295
Y = 5,180

Part C
R = 0.10
Y = 300 + 0.75Y + 1,000 100(0.10)
Solving Above equation
0.25Y = 1,290
Y = 5,160