Subpart (a):
Multiplier, MPC and change in GDP .
Subpart (a):
Explanation of Solution
Multiplier can be calculated as follows:
Multiplier is 2.5. If the MPS is 0.4, the multiplier will be 2.5.
If the MPS is 0.6 then the multiplier can be calculated as follows:
If MPS is 0.6, the multiplier will be 1.667. If the MPS is 1 then the multiplier will be infinity or undefined.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (b):
Multiplier, MPC and change in GDP.
Subpart (b):
Explanation of Solution
If MPC is 1, then the multiplier will be infinity or undefined. If MPC is 0.90, then the multiplier can be calculated as follows:
Hence, when MPC is 0.90, then the multiplier will be 10.
If MPC is 0.67, then multiplier can be calculated as follows:
Hence, when MPC is 0.67, then the multiplier will be 3.
If the MPC is 0.50, then the multiplier can be calculated as follows:
Hence, when MPC is 0.50 the multiplier will be 2.
If MPC is 0, then the multiplier can be calculated as follows:
Hence when MPC is 1, then the multiplier will be 1.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (c):
Multiplier, MPC and change in GDP.
Subpart (c):
Explanation of Solution
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $40 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (d):
Multiplier, MPC and change in GDP.
Subpart (d):
Explanation of Solution
In case, if 0.67 is MPC, the change in GDP will be equal to $24 billion. In this case, the multiplier will be 3.
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $24.24 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
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Chapter 30 Solutions
ECONOMICS
- Suppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward1.) Suppose a closed economy with no government spending or taxing is capable of producing an output of $2050 at full employment. Suppose also that autonomous consumption is $150, intended investment is $60, and the mpc is 0.50. How much additional autonomous spending (for instance, from the government) is needed to move the economy to full employment? 2.)Suppose a closed economy with no government spending or taxing is capable of producing an output of $1200 at full employment. Suppose also that autonomous consumption is $120, intended investment is $70, and the mpc is 0.50. What is the value of output (Y) in equilibrium? 3.)Suppose output and income is equal to 24400, the marginal propensity to consume is 0.80, and autonomous consumption is 650. Calculate total saving for this economy, assuming no public or foreign sector. (Round your answer to the nearest whole number.) 4. According to the lectures, which of the following ideas are representative of (neo)classical…arrow_forwardSuppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy�s multiplier is 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion..arrow_forward
- 2. In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregateproduction of income by Y. Which one of the following statements is incorrect? A When A is greater than Y, there is disequilibrium and Y will tend to increase.B When A is equal to Y, there is equilibrium and Y will remain unchanged.C When A is less than Y, there is disequilibrium and Y will decrease.D When A is greater than Y, there is disequilibrium and A will decrease.arrow_forward1.In Figure 1, when disposable income is 0, how much is consumption, saving, autonomous consumption, and induced consumption? 2.In Figure 1, when disposable income is 2500, how much is consumption, saving, autonomous consumption, and induced consumption? 3.In Figure 1, when disposable income is 4,000, how much is the consumption, savings, autonomous consumption and induced consumption?arrow_forward16. Suppose that planned investment and planned government purchases do not depend on income:I = 15 and G = 17. Consumption, as you would expect, does depend on income via the consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12. Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best description of this situation? a. the (Y, AE) point is above the 45 degree line, Y will adjust down b. the (Y, AE) point is above the 45 degree line, Y will adjust up c. the (Y, AE) point is below the 45 degree line, Y will adjust down d. the (Y, AE) point is below the 45 degree line, Y will adjust up 17. (continued) Help you friend by calculating the equilibrium income for the AE model in the previous question. Y = _____arrow_forward
- 1. According to the Bureau of Economic Analysis, during therecession of 2007–2009, household saving as a fraction of dis-posable personal income increased from a low of just over1 percent in the first quarter of 2008 to 5 percent in the secondquarter of 2009. All else equal, what impact would this changein saving have on the MPC, MPS, and multiplier? How wouldthis change affect equilibrium output when planned invest-ment changes? 2. Assume in a simple economy that the level of saving is –500 whenaggregate output equals zero and that the marginal propensity tosave is 0.2. Derive the saving function and the consumption func-tion, and draw a graph showing these functions. At what level ofaggregate output does the consumption curve cross the 45° line?Explain your answer and show this on the graph.arrow_forward5 3. permanent Income Hypothesis a) suppose that beta=.9 and R= 2222 (that is ~22%). For an individual who acts according to the PIH, will their consumption next period be higher than current consumption or lower? b) What is the main crucial difference between the Keynesian Consumption function and the consumption function derived from the PIH (or Lifetime Income Hypothesis)? c) If Present Value of future income stream is 500,000 and a person has a beta of.8, how much will their consumption go up today if only today's income increases by 1000? How much will their consumption increase (approximately) if their income goes up by 1000 in all periods?arrow_forwardi need this in word not handwritten Q7. Assume that in 2015, the following prevails in the Republic of Nurd: Y = $200 G = $0 C = $160 T = $0 S = $40 I (planned) = $30 Assume that households consume 80 percent of their in- come, they save 20 percent of their income, MPC = 0.8, and MPS = 0.2. That is, C = 0.8Yd and S = 0.2Yd. Is the economy of Nurd in equilibrium? What is Nurd’s equilibrium level of income? What is likely to happen in the coming months if the government takes no action? 2. If $200 is the “full-employment” level of Y, what fiscal policy might the government follow if its goal is full employment? 3. If the full-employment level of Y is $250, what fiscal policy might the government follow? 4. Suppose Y = $200, C = $160, S = $40, and I = $40. Is Nurd’s economy in equilibrium? 5. Starting with the situation in part d, suppose the government starts spending $30 each year with no taxation and continues to spend $30 every period. If I remains constant, what…arrow_forward
- ADVANCED ANALYSIS Assume that the consumption schedule for a private closed economy is such that consumption is: C = 100 + 0.75Y Assume further that planned investment Ig is independent of the level of real GDP and constant at Ig = 50. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig Instructions: Enter your answers as whole numbers.a. Calculate the equilibrium level of income or real GDP for this economy. Equilibrium GDP (Y) = $ . b. What happens to equilibrium GDP if Ig changes to 60? Equilibrium GDP (Y) = $ . What does this outcome reveal about the size of the spending multiplier? Spending multiplier = .arrow_forward2. Suppose that consumption equals $500 billion when the disposable income is $0 and that each increase of $100 billion in disposable income causes consumption to increase by $70 billion. a. Draw a graph of the consumption function using this information. The axes must be labeled correctly, and the consumption function should have at least two points on the graph (correct coordinates). b. What is the Marginal Propensity to Consume in this economy? How did you arrive at your answer? Please show your work. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward3. Assume that initially G is $300 and equilibrium real GDP is $5000. If the multiplier is 5, what would be the new equilibrium level of GDP if Government expenditures increase to $600.arrow_forward
