Principles of Macroeconomics (11th Edition)
11th Edition
ISBN: 9780133023671
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 8, Problem 5P
To determine
The multiplier process.
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Students have asked these similar questions
a. Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate
the new equilibrium level, Y', to verify this.
b. Now suppose investment increases to I = 100, just as, in problem 1(d). What is the new
equilibrium income?
Does this change in investment spending have more or less of an effect on Y than it did
in problem 1? Why?
Draw a diagram indicating the change in equilibrium income in this case.
с.
d.
3. Now we look at the role taxes play in determining equilibrium income. Suppose we have an
economy of the type in Sections 10-4 and 10-5, described by the following functions:
C = 50 +.8YD
I = 70
G = 200
TR = 100
1-0-0-20.
t = .20
a. Calculate the equilibrium level of income and the multiplier in this model.
b. Calculate also the budget surplus, BS.
c. Suppose that t increases to .25. What is the new equilibrium income? The new multiplier?
d. Calculate the change in the budget surplus. Would you expect the change in the surplus
to be more or less if c = .9…
What is the multiplier effect?
The multiplier is simply the ratio of the change in (r
spending. Multiplying the initial change in spending by the multiplier gives you the amount of
change in real GDP.
G
) to the initial change in
The multiplier effect can work in a positive or a negative direction. An initial increase in spending will
result in a (smaller, larger) increase in real GDP, and an initial decrease in spending will result in
a larger (increase, decrease ) in real GDP. The multiplier magnifies the fluctuations in economic
activity initiated by changes in investment spending, net exports, government spending, or
consumption spending.
The multiplier is related to the marginal propensities. The MPC is (directly, inversely ) related to the size
of the multiplier. The MPS is (directly, inversely ) related to the size of the multiplier.
What will multiplier and MPS be when the MPC is .9, and 0.5?
MPC
MPS
Multiplier
.9
.5
How much of a change in GDP will result if firms increase…
Based on the following information:
C = 40 + 0.7Yd, T = Tg – R, I = 200, G = 350, Tg = 60, R = 40
calculate the equilibrium level of income (Ye).
calculate the value of kG, kTg and kR, where k is the multiplier..
calculate the values of C, S and T at Ye level.
calculate the new equilibrium level of income if I increases by 10 percent.
if G increases to 550 units and it is fully funded by the rise in T, what is the impact
on Ye?
if Tg increases to 85 units and R increases to 50 units, what is the effect on the
level of Ye?
Given the following information.
C = 600 + 0.8Yd , Yd = Y – T, Tg = 100, I= 200, R = 50, G = 350,
X = 250 and M = 200 + 0.1Y.
Calculate the equilibrium level of income (Ye).
Show the equilibrium level of income by using diagrams of both aggregate
expenditure-income (AE-Y) approach and injection-leakage approach,
How much investment should be increased if the government wants to increase
the national income by 2000?
How much tax has to be reduced so that…
Chapter 8 Solutions
Principles of Macroeconomics (11th Edition)
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Similar questions
- How is it possible for investment spending to increase even in a period in which the real interest rate rises? Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?arrow_forward1) Determine the value of the multiplier for this economy, and find the equilibrium value of Y.arrow_forwardConstruct the multiplier model using the consumption function: and an investment spending I =20 (assume no G and NX): a) How much is the expenditure multiplier? b) How much is the equilibrium output with the given C and I? c) If government will increase its spending G = 20, how much will be the change in Y?arrow_forward
- What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.arrow_forwardIs the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?arrow_forwardWhich of the following is a true statement about the multiplier? The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate. The larger the MPC, the smaller the multiplier. The multiplier is the ratio of the change in spending to the change in GDP. The multiplier makes the economy less sensitive to changes in autonomous expenditure.arrow_forward
- If C = 12 + 4/5Y, I = 20, what is the values the marginal propensity to save? What is equilibrium level of Y? Show that in equilibrium S = I.arrow_forwardThe equilibrium position for an economy is represented by the following equations: Y = C + I, + G %3D C = a + b(Y – T) T = tY Let a = 25, b = 0.8 and t = (0.3. %3D Determine the value of the multiplier for this economy. Show your working.arrow_forwardConstruct the multiplier model using the consumption function C = 100 + 0.80Y and an investment spending I =20 (assume no G and NX): a) How much is the expenditure multiplier? b) How much is the equilibrium output with the given C and I? c) If government will increase its spending G = 20, how much will be the change in Y?arrow_forward
- Find out the value of the multiplier if the MPC is zero?arrow_forwardFor the multiplier to be positive what condition must be satisfied?arrow_forwardYou are given the following data concerning Freedonia, a new republic. 1) Consumption is 200 when income is zero and the marginal propensity to consume is 0.6 out of every dollar increase in income 2) Investment function: I = 200 3) AE ≡ C + I 4) AE = Y Questions A. Derive the savings function? B. Graph equations 3) and 4) and solve for equilibrium income (Y). C. Suppose equation 2) is changed to I = 150. What is the new equilibrium level of income (Y)? By how much does the $50 decrease in planned investment change equilibrium income? What is the value of the tax multiplier?arrow_forward
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