Given the following information for the Macro Economy answer the following quest

Question

Given the following information for the Macro Economy answer the following questions.

In this economy we have an MPC equal to 0.80, Autonomous Consumption of $600 billion, Planned Investment (I) of $1,000 billion, Government Spending (G) of $1,200 billion and Net Taxes (T) of $1,000 billion.

a) Fill in the missing data for: T, Yd, C, S, and AE (in that order in a table) for every level of Y given below (all the numbers are in billions).

Income (Y) Net Taxes (T) Disposable Income (Yd) Consumption (C) Savings (S) Aggregate Expenditures (AE)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000




b) Determine the Equilibrium level of Aggregate Income (Ye). Please state the reason for your answer.

c) Calculate the Spending Multiplier (show how you got your answer).

d) State in one sentence what your answer in (c) above tells us about any decrease in spending that takes place in the economy.

e) If this economy had a full employment level of income equal to $8,000 billion, what Macroeconomic condition is this economy experiencing.

f) Using the Spending Multiplier, determine the change in G that is needed to get this economy to be in equilibrium at full employment. Please show your work.

g) Using the Spending Multiplier, determine the change in T that is needed to get this economy to be in equilibrium at full employment. Please show your work.

Explanation / Answer

Y Net Taxes Disposable income Consumption Savings Agg Expenditure 2000 1000 1000 800 200 3000 3000 1000 2000 1600 400 3800 4000 1000 3000 2400 600 4600 5000 1000 4000 3200 800 5400 6000 1000 5000 4000 1000 6200 7000 1000 6000 4800 1200 7000 8000 1000 7000 5600 1400 7800 9000 1000 8000 6400 1600 8600 10000 1000 9000 7200 1800 9400 11000 1000 10000 8000 2000 10200 12000 1000 11000 8800 2200 11000 13000 1000 12000 9600 2400 11800 Disposable income = income - Taxes Consumption = 0.8*disposable income Savings = Disposable income - Consumption AE=C+I (b) Y = C + I + G + (X – M) Equilibrium level : Y = AE                =7000 ( c) Spending Multiplier = 1/(1-MPC) = 1/(0.2) 5

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