Question

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Assume you are given the following information for the economy of Macroland:

            GDP          C             S             I             G         (X – M)           AE              

                  0            200        _____    _____     _____           0          _____

            500            600        _____    100          100            0          _____

            1000          1000        _____    _____    _____           0          _____

            1500          ____        _____      100          100           0            _____

            2000          1800        _____       100          100           0            _____

            2500          2200        _____       100          100           0            _____

            3000          2600        _____       100          100           0            _____

            3500          ____        _____       100          100           0            _____

            4000          3400        _____       100          100           0            _____

            a. What is the MPC in this model? The MPS?

            b. Fill in the blanks in the table above.

            c. What is the level of equilibrium GDP? How do you know?

            d. If investment spending increases by $100, what is the new level of equilibrium

     GDP?

Answer 1

Table is provided below

GDP	C	S	I	G	X-M	AE
0	200	-200	100	100	0	400
500	600	-100	100	100	0	800
1000	1000	0	100	100	0	1200
1500	1400	100	100	100	0	1600
2000	1800	200	100	100	0	2000
2500	2200	300	100	100	0	2400
3000	2600	400	100	100	0	2800
3500	3000	500	100	100	0	3200
4000	3400	600	100	100	0	3600

a. What is the MPC in this model? The MPS?

MPC = Change in Consumption / change in GDP = 400/500 = 0.8 MPS = 1 - MPC = 1 - 0.8 = 0.2

b. We use the fact that GDP = C + S and that AE = C + I + G. G and I are constant at 100.

c. What is the level of equilibrium GDP? How do you know?

We use the rule AE = GDP. We therefore find that AE = GDP = 2000. Hence is the level of equilibrium GDP.

d. If investment spending increases by $100, what is the new level of equilibrium GDP?

Multiplier is 1/1-mpc = 1/1-0.8 = 5. If investment spending increases by $100, increase in equilibrium GDP = 100*5 = $500. New GDP = 2000 + 500 = 2500