a. Given these values, what is the equilibrium GDP? $ billion. What is the margi

Question

a. Given these values, what is the equilibrium GDP?  $ billion.

     What is the marginal propensity to consume?

    Instructions: Round your answer to 1 decimal place.

    MPC = .

     What is the value of the multiplier? .

b. Incorporate government into the table by assuming that it plans to spend $20 billion at each possible level of GDP.

     What is the new equilibrium GDP due to the increased government spending? $ ___billion.

c. Now incorporate taxes into the table by assuming that the government plans to tax households $20 billion at each possible level of GDP (T increases by $20 billion). Also assume that the tax is a personal tax and includes the government spending increase from part b.

     What is the change in consumption due to the tax increase? $ _____billion.

     Accounting for both the increased government spending and taxation, what is the new equilibrium GDP? $ ___billion.

     What is the change in equilibrium GDP caused by the addition of government? $ ___billion.

(1) (2) (3) (4) (5) (6) Real Domestic Output, Billions Aggregate Expenditures, Billions Exports, Billions Imports, Billions Net Exports, Billions Aggregate Expenditures, Open Economy, Billions 200 $240 $20 $30 -10 230 250 280 20 30 -10 270 300 320 20 30 -10 310 350 360 20 30 -10 350 400 400 20 30 -10 390 450 440 20 30 -10 430 500 480 20 30 -10 470 550 520 20 30 -10 510

Explanation / Answer

A) equilibrium is where Y=AE thus Y=400 billion

MPC=change in C/change in Y=40/50=0.8

Multiplier=1/1-mpc=1/0.2=5

B)when G increases 20 billion then equilibrium level of GDP increases by multiplier*change in G=5*20=100

Thus new Y=500

C)tax multiplier=-mpc/1-mpc=-0.8/0.2=-4 consumption decreases by 16 units in one period

Thus tax reduces income by 80. Thus new equilibrium Gdp=420

Change in GDP=20billion

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