Need help on this question, I tried the ones i know.
a The consumption function is C = 1.5 + 0.75(Y-T). What is the marginal propensity to consume,
MPC? What is the marginal propensity to save, MPS?
ans: MPC=0.75 and MPS=1-MPC=0.25 correct?
b The trade balance is TB = 5(1-[1/E])-0.25(Y-8).What is the marginal propensity to consume foreign goods,MPCF ? What is the marginal propensity to consume home goods, MPCH?
c The investment function is I=2-10i. What is investment when the interest rate i is equal to 0.10=10%?
ans: I=2-10(0.1)=1
d Assume government spending is G. Add up the four components of demand and write down the expression for D.
e Assume forex market equilibrium is given by i = ([1/E]-1)+0.10 where the two foreign return terms on the right are expected depreciation and the foreign interest rate. What is the foreign interest rate?
What is the expected future exchange rate?
a) correct.
b) the "imports" part of the equation is .25(Y-8). So the MPCF is .25
Alone, I don't think there is enough information to determine the MPCH -- Unless you can use the overall consumption function from a). If so, the MPCH=.75-.25 = .50
c)correct
d) D=C+I+G+(E-M) = 1.5+.75(Y-T) + (2-10i) + G + (5(1-1/E)-.25(Y-8))
e) something seems missing here. Is i is the foreign interest rate or the domestic interest rate? is E exports or the expected depreciation rate. I am confused.
e) i believe i is the domestic interest rate and ([1/E]-1) is the expected depreciation and 0.10 is the foreign interest rate. E i think is the spot exchange rate.
I don't get why its asking for foreign interest rate again?
I don't understand why depreciation is in the equation. I think of depreciation as the degradation of a physical asset over time. Depreciation affects interest rates in a round-a-bout way.
That said, is it possible that 0.10 is the depreciation rate and 1/E-1 is the foreign interest rate, where E is not the nominal spot exchange rate but normalized exchanged rate;
Anyway, I'm stumped
For d) the text this question is from uses the formula i(home)=i(foreign)+[E(expected)+E]/E. Assuming the question is just meant to recall knowledge of the formula from earlier in the chapter: i(foreign) = (1/E)-1 and expected depreciation = 0.1.
a) To find the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) in the given consumption function C = 1.5 + 0.75(Y-T), you need to understand that MPC represents the change in consumption for a given change in income, while MPS represents the change in savings for a given change in income.
In this case, the coefficient of (Y-T) in the consumption function is 0.75, which indicates that for every additional unit of income (Y) minus taxes (T), consumption (C) will increase by 0.75 units. Therefore, the marginal propensity to consume (MPC) is 0.75.
To find the marginal propensity to save (MPS), you subtract the MPC from 1, since MPS represents the portion of income that is saved. So, MPS = 1 - MPC = 1 - 0.75 = 0.25. Therefore, your understanding is correct - MPC = 0.75 and MPS = 0.25.
b) Similarly, for the trade balance function TB = 5(1-[1/E])-0.25(Y-8), you need to find the marginal propensity to consume foreign goods (MPCF) and the marginal propensity to consume home goods (MPCH).
To find the MPCF, you need to look for the coefficient of the term (1-[1/E]) in the trade balance function. Similarly, to find MPCH, look for the coefficient of (Y-8). Once you identify these coefficients, you will have the values for MPCF and MPCH.
c) In the investment function I = 2-10i, you are given the interest rate (i) as 0.10, which represents 10%. To find the investment (I) for this interest rate, substitute the value of i into the equation and solve for I.
I = 2 - 10(0.1)
I = 2 - 1
I = 1
Therefore, the investment when the interest rate is 0.10 is 1.
d) To write down the expression for D, which represents the sum of the four components of demand (consumption, investment, government spending, and net exports), you need to combine the relevant equations for each component.
For example, if the consumption function is C = 1.5 + 0.75(Y-T), the investment function is I = 2-10i, and the government spending is G, you would express D as:
D = C + I + G + TB
Here, TB represents the trade balance function, which you can substitute into the equation.
e) In the forex market equilibrium equation i = ([1/E]-1)+0.10, you are asked to find the foreign interest rate and the expected future exchange rate.
To find the foreign interest rate, you simply evaluate the equation since the value of i is not given. Once you solve the equation, the resulting value of i will be the foreign interest rate.
To find the expected future exchange rate, you need additional information. The equation you provided does not directly give the expected future exchange rate, so you would need to use additional data or information to calculate it.