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Calculating Demand-Side Macroeconomic Equilibrium

DEMAND SIDE EQUILIBRIUM ACTIVITY

1. From the following data, find the marginal propensity to consume, compute the expenditure at each level of GDP, and find the equilibrium GDP:

GDP C I G X IM

5,000 3,650 1,000 1,200 700 1,100
5,500 4,000 1,000 1,200 700 1,100
6,000 4,350 1,000 1,200 700 1,100
6,500 4,700 1,000 1,200 700 1,100
7,000 5,050 1,000 1,200 700 1,100
7,500 5,400 1,000 1,200 700 1,100

2. In an economy with no government sector, investment is 1,000, net exports are 100 and the consumption function is:

Income Consumption

3,000 2,100
3,500 2,500
4,000 2,900
4,500 3,300
5,000 3,700
5,500 4,100

a) Calculate the expenditure schedule, and find the equilibrium level of GDP.
b) What are savings at this equilibrium GDP?
c) What is the marginal propensity to consume?
d) What is the multiplier?
e) People lower their savings and raise their consumption by 200 at each level of GDP. Use the multiplier to find the new equilibrium GDP.
f) Confirm your answer to e) by calculating the new expenditure schedule.
g) What is the level of savings at the new equilibrium GDP?
h) Compare and explain your answers to b) and g).

Solution Preview

1. See the attached file. MPC = (Change in Consumption)/(Change in Income) = 350/500 = ...

Solution Summary

This solution shows how to calculate demand-side macroeconomic equilibrium given data for GDP, Consumption spending (C), Investment spending (I), Government spending (G), Exports (X), and Imports (IM). The solution also shows how to calculate the Marginal Propensity to Consume (MPC) and the spending multiplier, and how to use the multiplier to predict the change in equilibrium in response to a change in consumption spending. A spreadsheet is provided showing how every value was calculated.

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