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Chapter 26: Problem 5

The Bureau of Economic Analysis reported that, in real terms, overall consumer spending increased by \(\$ 66.2\) billion during the second quarter of \(2014 .\) a. If the marginal propensity to consume is \(0.52,\) by how much will real GDP change in response? b. If there are no other changes to autonomous spending other than the increase in consumer spending in part a, and unplanned inventory investment, \(I_{\text {Unplanned }}\), decreased by \(\$ 50\) billion, what is the change in real GDP? c. GDP at the end of the first quarter in 2014 was \(\$ 16,014.1\) billion. If GDP were to increase by the amount calculated in part b, what would be the percent increase in GDP?

Short Answer

Expert verified
Question: Calculate the percent decrease in real GDP from the first quarter to the second quarter of 2014, considering the given data. Answer: The percent decrease in real GDP from the first quarter to the second quarter of 2014 is approximately 0.0974%.

Step by step solution

01

Understand the given data and variables

From the problem, we have the following information: - Increase in consumer spending = \(\$ 66.2\) billion - Marginal propensity to consume (MPC) = \(0.52\) - Decrease in unplanned inventory investment = \(\$ 50\) billion - GDP at the end of the first quarter = \(\$ 16,014.1\) billion
02

Calculate real GDP change due to the marginal propensity to consume (MPC)

To find the real GDP change in response to the increased consumer spending, we'll use the following formula: Real GDP change = Increase in consumer spending x MPC Real GDP change = \((\$ 66.2\) billion) \times 0.52$
03

Calculate the real GDP change

Real GDP change = \((\$ 66.2\) billion) x 0.52 ≈ \$ 34.4$ billion So, the real GDP will change by approximately \(\$ 34.4\) billion.
04

Calculate real GDP change considering autonomous spending and unplanned inventory investment

Now we look at the changes in real GDP due to both increased consumer spending and decreased unplanned inventory investment. We can apply this formula: Real GDP change = (Increase in consumer spending x MPC) - Decrease in unplanned inventory investment Real GDP change = \((\$ 34.4\) billion) - (\$ 50$ billion)
05

Calculate the total change in real GDP

Real GDP change = \(\$ 34.4\) billion - \(\$ 50\) billion = - \(\$ 15.6\) billion So, after considering the changes in autonomous spending and unplanned inventory investment, the real GDP decreased by \(\$ 15.6\) billion.
06

Calculate the percent increase in GDP

Finally, we can calculate the percent increase in GDP by dividing the total change in real GDP from part b by the GDP at the end of the first quarter and multiplying by 100: Percent increase = \(\frac{-\$ 15.6 \,\text{billion}}{\$ 16,014.1 \,\text{billion}} \times 100\)
07

Compute the percentage change

Percent increase ≈ \(-0.0974 \%\) So, the percent increase in GDP is approximately \(-0.0974\%\), which means the GDP decreased by around \(0.0974\%\) from the first quarter to the second quarter of 2014.

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Most popular questions from this chapter

The U.S. economy slowed significantly in early 2008 , and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about \(\$ 700\) billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume $(M P C)\( in the United States is \)0.5 .$ Then calculate the resulting change in real GDP arising from the \(\$ 700\) billion in payments. b. Illustrate the effect on real GDP with the use of a graph depicting the income-expenditure equilibrium. Label the vertical axis "Planned aggregate spending, \(A E_{\text {Planned }}\) " and the horizontal axis "Real GDP." Draw two planned aggregate expenditure curves $\left(A E_{\text {Planned } 1}\right.\( and \)A E_{\text {Planned } 2}$ ) and a 45 -degree line to show the effect of the autonomous policy change on the equilibrium.

In an economy with no government and no foreign sectors, autonomous consumer spending is \(\$ 250\) billion, planned investment spending is \(\$ 350\) billion, and the marginal propensity to consume is \(2 / 3\). a. Plot the aggregate consumption function and planned aggregate spending. b. What is unplanned inventory investment when real GDP equals \(\$ 600\) billion? c. What is \(Y^{*}\), income-expenditure equilibrium GDP? d. What is the value of the multiplier? e. If planned investment spending rises to \(\$ 450\) billion, what will be the new \(Y^{*}\) ?

Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes and no foreign trade, what will be the change in GDP if the following events occur? a. There is an autonomous increase in consumer spending of \(\$ 25\) billion; the marginal propensity to consume is \(2 / 3\). b. Firms reduce investment spending by \(\$ 40\) billion; the marginal propensity to consume is 0.8 . c. The government increases its purchases of military equipment by \(\$ 60\) billion; the marginal propensity to consume is 0.6

Although the United States is one of the richest nations in the world, it is also the world's largest debtor nation. We often hear that the problem is the nation's low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP?

How will planned investment spending change as the following events occur? a. The interest rate falls as a result of Federal Reserve policy. b. The U.S. Environmental Protection Agency decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. c. Baby boomers begin to retire in large numbers and reduce their savings, resulting in higher interest rates.
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