Given an economy's Marginal Propensity to Consume (MPC), this solution shows how to calculate the economy's Marginal Propensity to Save (MPS), Spending Multiplier (SM), and the total and incremental increase in spending in the economy that results from an increase in government spending. All formulas and calculations are given in full.

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Calculating the Equilibrium Output Level

The economy of Alphaland is represented by the following:
C= 50 +0.25Yd
T=1000
G=1000
I=1000

(a) Calculate the equilibrium level of output. Graph your solution.
(b) If the government spending increases by 50 what is the new equilibrium level of output? Use the government spending multiplier.
(c) If the government increases taxes by 50 what is the new equilibrium level of output? Use the tax multiplier.
(d) If the government increases taxes and spending by 50 what is the new equilibrium level of output?
(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-25+0.125Y.

... Use the government spending multiplier. ... get dC/dY=0.25 We know that Marginal Propensity to Consume (MPC)=dC/dY=0.25 Marginal Propensity to Save (MPS)=1-0.25 ...

... is the value of the MPC (marginal propensity ... What is the value of MPS (marginal propensity ... for government expenditures (G), investment spending by businesses (I ...

... It is the change in consumption spending divided by the change ... in taxes yields a change in GDP of 10 x MPC/MPS. ... The higher the MPC, the more of each dollar is ...

... c. By assuming there is no change in the level of the MPC and the MPS, and planned ... Planned investment spending is a component of aggregate expenditures (AE ...

... The Government spending multiplier = ΔY / ΔG = 1/MPS = 1/(1-MPC) when there is an increase in government spending of ΔG = 100 Then the ...

... 7. The multiplier falls as MPS rises. ... that the economy starts at equilibrium and the mpc = 0.75 ... effect of a $300 increase in government spending on equilibrium ...

... What would be the spending multiplier in a closed economy.? ... The MPS is equal to 1-MPC. ... to answer this question: Open economy multiplier = 1 / (MPS + MPM) Using ...

... What would be the effect of a $300 increase in government spending once all the rounds of the multiplier process are ... Given MPC = 0.75 we get MPS = 0.25. ...