Refer to the information provided in the table below to answer the questions tha

Question

Refer to the information provided in the table below to answer the questions that follow All Figures in Billions of Dollars Consumption Output ancome) Net Spending Taxes (C-100+SY Investment Government Purchases Savings Spending 100 2,530 100 2,710 100 2,.890 100 300 100 3,250 100 170 150 190 150 210 150 230 150 250 150 270 2,800 3,200 3,400 3,600 3,300 1. Obtain the equilibrium level of income $3,600 billion. 2. What is the yiFO and MP 0.9 3. What is the value of the tax multiplier? 7 4. If the economy is at the equilibrium level of output and government spending increases by $200 billion, what is the new equilibrium level of output? $5,600 billion S. If the economy is at the equilibrium level of output and government spending decreases by 550 billion, what is the new equilibrium level of output?

Explanation / Answer

(1)

Planned aggregate expenditure (PAE) = Consumption (C) + Investment (I) + Government spending (G)

In equilibrium, Output (Y) = PAE

Equilibrium output = $3,600 billion

(2)

MPC = 0.9 (From given consumption function)

MPS = 1 - MPC = 1 - 0.9 = 0.1

(3)

Tax multiplier = - MPC / MPS = - 0.9 / 0.1 = - 9

(4)

Spending multiplier = 1 / MPS = 1 / 0.1 = 10

As government spending increases by $1, output increases by $10.

As government spending increases by $200 billion, output increases by ($200 billion x 10) = $2,000 billion.

New output ($ Billion) = 3,600 + 2,000 = 5,600

(5)

Spending multiplier = 1 / MPS = 1 / 0.1 = 10

As government spending decreases by $1, output decreases by $10.

As government spending decreases by $50 billion, output decreases by ($50 billion x 10) = $500 billion.

New output ($ Billion) = 3,600 - 500 = 3,100

Y C I G PAE ($ Billion) ($ Billion) ($ Billion) ($ Billion) ($ Billion) 2,400 2,170 150 200 2,520 2,800 2,530 150 200 2,880 3,000 2,710 150 200 3,060 3,200 2,890 150 200 3,240 3,400 3,070 150 200 3,420 3,600 3,250 150 200 3,600 3,800 3,300 150 200 3,650

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