MACROECONOMICS W/CONNECT
18th Edition
ISBN: 9781307253092
Author: McConnell
Publisher: Mcgraw-Hill/Create
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Question
Chapter 11, Problem 6P
Subpart (a):
To determine
Marginal propensity to consume and consumption schedule.
Subpart (b):
To determine
Marginal propensity to consume and consumption schedule.
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Assume that, without taxes, the consumption schedule of an economy is as follows: a. Graph this consumption schedule and determine the MPC. b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
Complete the following table:a. Show the consumption and saving schedules graphically.b. Find the break-even level of income. Explain how it is possible for households to dissave at very low income levels.c. If the proportion of total income consumed (APC) decreases and the proportion saved (APS) increases as income rises, explain both verbally and graphically how the MPC and MPS can be constant at various levels of income.
Consider an economy that is characterised by the following set of equations:
C
= co + C1YD
Yp
Y - T
I
bo + bịY
%3D
Government spending (G) and taxes (T) are constant. Note that investment () is proportional to
output (Y).
a) Solve for equilibrium output.
b) Using your answer derived in (a) identify and discuss the multiplier. How does the relation
between investment and output affect the value of the multiplier?
Chapter 11 Solutions
MACROECONOMICS W/CONNECT
Ch. 11.2 - Prob. 1QQCh. 11.2 - Prob. 2QQCh. 11.2 - Prob. 3QQCh. 11.2 - Prob. 4QQCh. 11.7 - Prob. 1QQCh. 11.7 - Prob. 2QQCh. 11.7 - Prob. 3QQCh. 11.7 - Prob. 4QQCh. 11 - Prob. 1DQCh. 11 - Prob. 2DQ
Ch. 11 - Prob. 3DQCh. 11 - Prob. 4DQCh. 11 - Prob. 5DQCh. 11 - Prob. 6DQCh. 11 - Prob. 7DQCh. 11 - Prob. 8DQCh. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - Prob. 3RQCh. 11 - Prob. 4RQCh. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - Prob. 7RQCh. 11 - Prob. 8RQCh. 11 - Prob. 9RQCh. 11 - Prob. 1PCh. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Prob. 9PCh. 11 - Prob. 10P
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- 1. Assume in a simple economy that the level of saving is –500 when aggregate output equals zero and that the marginal propensity to save is 0.2. Derive the saving function and the consumption function, and draw a graph showing these functions. At what level of aggregate output does the consumption curve cross the 45° line? Explain your answer and show this on the graph.2. Use your answer to the previous problem to calculate the MPC, MPS, government spending multiplier, and tax multiplier. Draw a graph showing the data for consumption spending, planned aggregate expenditures, and aggregate output. Be sure to identify the equilibrium point on your graph. Sorry, these two questions are linked. I totally forgot.arrow_forwardWould each of the following lead to a decrease in national income? a. An increase in imports (Click to select) lead to a decrease in national income. b. A decrease in interest rates (Click to select) lead to a decrease in national income. c. A decrease in the money supply (Click to select) lead to a decrease in national income. d. An increase in the exchange rate (Click to select) e. A decrease in foreign incomes (Click to select) (Click to select) lead to a decrease in national income. lead to a decrease in national income. would would notarrow_forwardSuppose that the initial 10 billion increase in the investment spending expands GDP by 10 billion in the first round of multiplier process. If GDP and consumption both rise by 6 billion in the second round of the process, what is the MPC in this economy? What is the size of the multiplier? If instead, GP and consumption both Rose by 8 billion in the second round, what would’ve been the size of the multiplier? arrow_forward
- 1. Briefly describe the concept multiplier. 2.Briefly describe the concept extrapolation.arrow_forwardSilesia You are provided with the following information about an imaginary economy called Silesia. Use the information provided in the table to answer the questions below. Government expenditure 400 Exports 250 Autonomous imports 50 Autonomous consumption 150 Investment Expenditure 300 Full-employment output 2040 Marginal propensity to consume 0.75 Marginal propensity to import 0.15 Source: Bester, N. 2017. Tax rate 0.25 5.1 Derive and calculate the consumption function for the data provided. Show all formulas and calculations used. 5.2 Calculate autonomous spending. Show all formulas and calculations used 5.3 Calculate the multiplier. Show all formulas and calculations used. Round off your final answer to 1 decimal.arrow_forward1. Suppose the households in a hypothetical economy has the following consumption function C= a + cYd. Where is the disposable income. The government in this economy imposes a tax rate of to households’ income (ex. A means that 10% of households’ income goes to tax payments). a. What is the equation that describes the disposable income of households? b. What is the Planned Expenditure Equation? Assume that government expenditure is exogenous and Investment function is given by the equation I = I-br Where is the interest rate. c. Derive the equilibrium output in the goods market and show that the multiplier in this model is 1/1c(1-t). d. How does and the tax rate affects this multiplier (e.g., what happens to multiplier if c increases cet.par. , or if tax rate increases, cet.par)?arrow_forward
- Using the table below to answer the following questions. Assume all values represent trillions of dollars. Construct a graph of the Aggregate planned expenditure What is the equilibrium expenditure? Explain what happens at a real GDP of $4 trillion dollars. (Note the aggregate expenditures and the effects on inventories) What are your total autonomous expenditures? What is the marginal propensity to consume? Ignoring imports and income taxes, what is the multiplier? If investment increases by $1.5 trillion, what is the change in real GDP?arrow_forwardConsider the hypothetical country of Kejimkujik. Suppose that national income in Kejimkujik is $300 billion, households pay $100 billion in taxes, household consumption is equal to $160 billion, and the marginal propensity to consume (MPC) is 0.6. On the following graph, use the blue line (circle symbol) to plot the economy's consumption function. Consumption Function050100150200250300350400450500500450400350300250200150100500CONSUMPTION (Billions of dollars)DISPOSABLE INCOME (Billions of dollars) Suppose now that Kejimkujik’s national income increases to $330 billion. Assuming the amount paid in taxes is fixed at $100 billion and that MPC = 0.6, what is the new amount of household consumption? $148 billion $219.4 billion $220.6 billion $178 billionarrow_forwardSuppose that an initial $ 10 billion increase in investment spending expands GDP by $ 10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $ 6 billion in the second round of the process. Instructions: In parts a and b, round your answers to 1 decimal place. In part c enter your answer as a whole number. A) What is the MPC in this economy? B) What is the size of the multiplier? C) If, instead, GDP and consumption both rose by $ 8 billion in the second round, what would have been the size of the multiplier?arrow_forward
- Consider a hypothetical economy described by the following information: C = 500 = 100 G = 200 T = 80 mpc = :0.6 Task 1. Answer the following given the information above. A. Set up the consumption function of this economy. Simplify your answer. B. Compute for the equilibrium income. C. Compute for the value of the multiplier. D. Compute for the change in equilibrium income if the government decreased its expenditure to 100. E. Derive the savings function of this economy. F. Compute for the value of savings suppose the economy is in equilibrium.arrow_forwardGive an example of any factor that influences the size of the multiplier?arrow_forwardThe multiplier process can occur when a decrease in investment spending… a) Increases household saving, causing consumers to buy more goods and services.b) Reduces household incomes, causing consumers to buy fewer goods and services.c) Increases household incomes, causing consumers to buy fewer goods and services.d) Reduces household incomes, causing consumers to buy more goods and servicesarrow_forward
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