Chapter 11: Q4. (page 237)
Suppose that a certain country has an MPC of 0.9 and a real GDP of \(400 billion. If its investment spending decreases by \)4 billion, what will be its new level of real GDP?
The new level of GDP will be $360 billion.
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Assume that, without taxes, the consumption schedule of an economy is as follows.
GDP, Billions | Consumption, Billions |
\(100 | \)120 |
200 | 200 |
300 | 280 |
400 | 360 |
500 | 440 |
600 | 520 |
700 | 600 |
Graph this consumption schedule and determine the MPC.
Assume now that a lumpsum 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.
By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?
Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed economy?
Assuming the level of investment is \(16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. What are the values of the MPC and MPS?
| Possible Levels of Employment, Millions | Real Domestic Output (GDP = DI), Billions | Consumption, Billions | Saving, Billions |
| 40 | \)240 | $244 | |
| 45 | 260 | 260 | |
| 50 | 280 | 276 | |
| 55 | 300 | 292 | |
| 60 | 320 | 308 | |
| 65 | 340 | 324 | |
| 70 | 360 | 340 | |
| 75 | 380 | 356 | |
| 80 | 400 | 372 |
Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + Xn.
Calculate the equilibrium level of income or real GDP for this economy.
What happens to equilibrium Y if Ig changes to 10? What does this outcome reveal about the size of the multiplier?
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