Purchase Solution

Autonomous Spending

Not what you're looking for?

Ask Custom Question

Please see attached.

---
2. (A Change in Autonomous Spending) Suppose that when aggregate output equals zero, consumption equals $100 billion, autonomous investment equals $200 billion, government purchases equal $50 billion, and net exports equal $50 billion. Suppose also that MPC is 0.9 and MPM is 0.1.

a) Construct a table showing the level of aggregate spending, net exports, and saving plus net taxes for aggregate output levels of zero, $500 billion, and $1,000 billion.

b) Use autonomous spending and the multiplier to calculate the equilibrium level of real GDP demanded.

c) What would be the new level of real GDP demanded if an increase in the U.S. interest rate caused net exports to change by $50 billion? Explain.
---

Attachments
Purchase this Solution
Solution Summary

Please calculate the equilibrium level of real GDP demanded.

Solution Preview

Different books sometimes choose to model the variables in this question in slightly different ways. I'll use the most common one here and explain it as clearly as possible so that you will be able to adjust the calculations if in your class you use different models/formulae.

I'll assume here that the consumption function has the form:

C = Co + MPC*Y

where Y is aggregate output and Ca is autonomous spending.

I will assume the investment and government purchases to be fixed for any value of aggregate output:

I = Io
G = Go
(notice that they are fixed in that neither of them depends on Y)

Finally, I'll assume that the net exports follow this formula:

NX = X - M = Xo - MPM*Y

where Xo is the exports level (which is fixed; i.e. doesn't depend on Y).

Now, in order to answer question 1 we must find all the formulae. Let's start ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • the level of real GDP demanded

    Autonomous spending falls by $5 billion. c. Autonomous spending rises by $20 billion. a. Autonomous spending rises by $8 billion.

  • multiplier model

    Because government spending is an autonomous expenditure and doesn't affect the income side, while tax cutting is an induced change in economy. Government spending multiplier = ΔY / ΔG = 1/MPS.

  • Macroeconomic concepts for national income

    An increase in autonomous spending shifts the The multiplier is 1/(1-mpe) = 5 The change in income is therefore 5 x 20 = $100 Income rises.

  • Spending by Individuals, Firms, and Governments

    266185 Open economy aggregate expenditure model Given the following variable in the open economy aggregate expenditure model, autonomous consumption (C0) = 200, autonomous investment (I0) =200, government spending (G0) = 100, export spending (X0) = 100

  • expansionary monetary policy and contractionary monetary policy

    At an income of $10,000, what are autonomous expenditures? c. What is the marginal propensity to expend? d. What is the multiplier? Expansionary monetary policy is any monetary policy that induces firms, and households to increase their spending.

  • Hypothetical Economy with Fixed Price Level and Interest Rates

    the increase in the autonomous expenditure is completely explained by the change in government spending, that is the amount.

  • The change in equilibrium output

    To find the change in equilibrium expenditure when autonomous consumption rises by 50, just add 50 to the consumption function and solve.

  • Simple spending multiplier

    (Simple Spending Multiplier) For each of the following values for the MPC, determine the size of the simple spending multiplier and the total change in real GDP demanded following a $10 billion decrease in autonomous spending: a.

  • investment spending

    The autonomous increase in Investment spending will cause a horizontal shift of the AD curve (outside) by an amount given by the oversimplified multiplier.

View More Related Solutions