Suppose that the MPC is 0.8, while the sum of planned investment, government purchases, and net exports is $500 billion. Suppose also that the government budget is in balance.

What is the sum of saving and net taxes when desired spending equals real GDP? Explain.

What is the value of the multiplier?

Explain why the multiplier is related to the slope of the consumption function.

Solution Preview

Suppose that the MPC is 0.8, while the sum of planned investment, government purchases, and net exports is $500 billion. Suppose also that the government budget is in balance.

What is the sum of saving and net taxes when desired spending equals real GDP? Explain.

GDP equals aggregate expenditures of consumption, gross investment, government spending, and net exports
Sum of saving and net taxes when desired spending equals real GDP= Planned Investment +Government ...

Solution Summary

This explains the concept and computation of value of the multiplier, the sum of saving and net taxes, and how the multiplier is related to the slop of the consumption function.

Given an increase in spending of $1,000, and a Marginal Propensity to Consume (MPC) of 80% (8/10), what would be the total increase in the GDP (as a result of theMultiplier?) What would theMultiplier be? Please show all work to help me clearly understand this problem.

You are given the following data concerning Freedonia, a legendary country:
(1) Consumption function: C = 200 + .8Y
(2) Investment Function: I = 100
(3) AE is equal to C + I
(4) AE = Y
a. What is the marginal propensity to consume in Freedonia, and what is the marginal prosperity to save? MPC is C/Y, 1 MINUS MPC IS THE

(See attached file for full problem description)
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HYPOTHETICAL INCOME DATA (BILLIONS OF DOLLARS)
(NET EXPORTS IS ASSUMED TO BE ZERO)
Y (GDP) C I G
$0 $100 $80 $60
100 175 80 60
200 250 80 60
300 325 80 60
400 400 80 60
QUESTIONS
1. What

In the simple economic model with no government or foreign sectors, thevalue of themultiplier is defined as:
1/MPC.
1/(1-MPC).
1/(MPC-1)
1/(MPC+1).
None of the above.

Suppose that, throughout the U.S. economy, individuals spend 90% of every additional dollar that they earn. Economists would say that an individual's marginal propensity to consume is 0.90. For example, if Jane earns an additional dollar, she will spend 0.9(1)=$0.90 of it. The individual that earns $0.90(from Jane) will spend

Discuss answers to the following questions:
Consider an economy in which: C=100+0.5Y and I=100 - output is equal to income
a) Find equilibrium income.
b) What is themultiplier for consumption spending for this economy?
c) What is themultiplier for investment spending for this economy?
d) What is the marginal pro

Use the information in the table to calculate thevalue of the simple multiplier for the following economy.
Year Income(Y) Consumption (C) Savings (S) Investment (I)
(m) (m) (m) (m)
1 200 160

Suppose that the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05.
How does this affect the simple money multiplier, assuming that excess reserved are held to zero and there are no currency leakages?
What are the money multipliers for required reserve ratios of 0.15 and 0.20?