Assume the consumption schedule for a hypothetical economy in which prices are f

Question

Assume the consumption schedule for a hypothetical economy in which prices are fixed as shown in the table below. All figures are in billions. Planned investment is $42 billion, government expenditures are $16 billion and net exports are zero.

a. Based on this informaton, fill in the last three columns of the table.

b. What is the equilibrium GDP?

c. What is the value of the marginal propensity to consume and the multiplier?

d. Based on the value of the multiplier, what would be the change in equilibrium GDP if government expenditures increased by $4 billion?

Real GDP Consumption Planned Investment Government Expenditures Aggregate Expenditures

$550 $520 ? ? ?

560 526 ? ? ?

570 532 ? ? ?

580 538 ? ? ?

590 544 ? ? ?

600 550 ? ? ?

610 556 ? ? ?

620 562 ? ? ?

630 568 ? ? ?

Explanation / Answer

a.

Aggregate expenditure = C+I+G+NX

I=42, G=16, NX=0

b.

Equilibrium GDp is where Real GDP is equal to aggregate expenditure that is 620

C.

MPC= dC/dY = .6

Multiplier = 1/(1-MPC) = 2.5

D.

Government expenditure multiplier = 1/(1-MPC) = 2.5

If Government expenditure increases by $4 billion hten GDP will increase by

multilier* dG = $10 billion

New equilibrium GDP = 630

Real GDP Consumption Planned Investment Government Expenditures Aggregate Expenditures MPC 550 520 42 16 578 0.6 560 526 42 16 584 0.6 570 532 42 16 590 0.6 580 538 42 16 596 0.6 590 544 42 16 602 0.6 600 550 42 16 608 0.6 610 556 42 16 614 0.6 620 562 42 16 620 0.6 630 568 42 16 626 0.6

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