DD209 Running The Economy : Activity 4.3 and online Tutorial 5a

Most of the Activities in the book and online give really good explanations, however there are a few that do not, and added to the confusion with errors in forumulae on p151 and miss labelled graph axis on other pages, it is possible to spent quite a lot of time chasing the proverbial wild geese.

One such activity is Activity 4.2, page 145. It provides you with the answer, but no explanation as to how this answer was arrived at.

My take on it is that you have to accept that the values 'a' and 'I' don't matter, which can be difficult to do and you have to have confidence in your algebra in order to do this, however.

AD = a + bY + I + G

AD = Y (at equilibrium)

Y = a +bY + I + G

Y – bY = a + I + G

Y(1 –b) = a + I + G

Y = a + I + G / (1-b)

Y = a + I + G / (1/2)

Y = 2 (a + I + G )

So, how much does Income increase with a Fiscal stimulus of £300M, is the question.

Without any stimulus, G = 0,

Y = 2(a + I)

With £300M stimulus

Y = 2(a + I + £300M)

Y = 2(a + I) + 2(£300M)

Y = 2(a + I) + £600M

So with,

G = 0,          Y = 2(a +I),
with

G = £300M, Y = 2(a + I) + £600M,

we can say that as the 2(a + I) amount is equal, the benefit of the £300M stimulus is an extra £600M income.

Which is the answer in the book.

The online tutorial also left you wondering what was going on at some points – even when given the answer.

 Week 5 Tutorial 1a Look at graph and fill in the blanks C = BLANK plus BLANK Y

C = a + bY

a = point at which the consumption function touches the vertical axis = 70 (this was quite difficult to see as the horizonatal line G is actually at value 90, and my eyesight isn’t what it used to be, so a = 70)

C = 70 + bY

So how to calculate b ?

Take any easily identifiable position on the line, say Y = 100 (on hozizontal axis) at this point C = 130 on the vertical..

Therefore 130 = 70 + b(100), so 130 – 70 = b(100), which means 60 = b(100), divide by 100 and

0.6 = b,

answer is C = 70 + 0.6Y

Check by picking another value of Y, say 200 (look on the graph as if C = about 190 – difficult to tell exactly)

C = 70 + 0.6 (200) = 190, so this is the correct answer.

So Week 5 finished, and quite a lot of reading to do before the Tutorial at the weekend if I am to be up to date with the study planner. I suspect this is a forlorn hope. Study fatigue may be setting in :-)