Question

In: Economics

Components RM (million) Autonomous Consumption (Co) 55 Investment (I) 165 government expenditure (G) 195 Personal Income...

Components	RM (million)
Autonomous Consumption (C_o)	55
Investment (I)	165
government expenditure (G)	195
Personal Income Taxes (T)	255
Net Export (NX)	0

Using information in the table above, given the marginal propensity to consume (MPC) is 80%, find the following;

Derive the consumption function.

Derive the saving function.

Derive the total expenditure (TE) curve.

Draw the aggregate expenditure curve.

What is equilibrium real GDP for Keynesian Island?

If the government increases its purchases by RM 200 million, what will be the new equilibrium real GDP? [Hint: Show your computation using multiplier

Solutions

Expert Solution

(a) Consumption function: C = Co + MPC (YD)

Where, Co is autonomous consumption. Autonomous consumption is the level of consumption at zero level of output.

YD is disposable income.

YD = Y - T

=> C = 55 + 0.8YD

consumption is measured in RM million

-------------------------------------------------------------------------------------------------

(b) Saving function: S = So + MPS (YD)

So is the saving at zero level of income. It is equal to negative of autonomous consumption.

=> So = -55

MPC + MPS = 1

=> MPS = 1 - MPC

=> MPS = 1 - 0.8

=> MPS = 0.2

S = -55 + 0.2YD.

Saving is measured in RM million

-------------------------------------------------------------------------------------------------

=> TE = 55 + 0.8(YD) + 165 + 195 + 0

=> TE = 415 + 0.8(Y - T)

=> TE = 415 + 0.8(Y - 255)

=> TE = 415 + 0.8Y - 204

=> TE = 211 + 0.8Y

Note: TE and aggregate expenditure are same.

TE is measured in RM million

-------------------------------------------------------------------------------------------------

(d) TE =AE = 211 + 0.8Y

Note: TE = aggregate expenditure

-------------------------------------------------------------------------------------------------

(e) At equilirium; Y = AE

=> Y = 211 + 0.8Y

=> Y - 0.8Y = 211

=> 0.2Y = 211

=> Y = 211/0.2

=> Y = 1055

Equilirium real GDP is RM1055 million.

-------------------------------------------------------------------------------------------------

(f) MPC = 0.8

Government spending multiplire = 1 / (1-MPC)

Government spending multiplire = 1/ (1 - 0.8)

Government spending multiplire = 5

Government spending increases by RM 200 million.

----------------------

Government spending multiplier = (change in real GDP / change in government spending)

=> 5 = (chnage in real GDP / RM 200 million)

=> Change in real GDP = 5 * RM 200 million

=> Change in real GDP = RM 1000 million

Hence. the real GDP will rise by RM 1000 million.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Income (Yd) Consumption Expenditure (C) Saving (S) Investment Expenditure (I) Government Expenditure (G) Net Export...

Income (Yd) Consumption Expenditure (C) Saving (S) Investment Expenditure (I) Government Expenditure (G) Net Export Expenditure (NX) Aggregate Expenditure (AE) $8000 $11,000 $2,500 $5,000 $12,500 12,000 14,000 2,500 5,000 12,500 20,000 20,000 2,500 5,000 12,500 30,000 27,500 2,500 5,000 12,500 50,000 42,500 2,500 5,000 12,500 100,000 80,000 2,500 5,000 12,500 1. Calculate: Savings, MPC, MPS, Multiplier, and the equilibrium level of income (Y = AE = C + I + G + NX). 2. Draw a graph showing disposable...

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net...

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net export spending total $250 billion, and the MPS is 0.25, what will unplanned changes in inventory be when output is $1.010 trillion? $4 billion –$4 billion –$5 billion $5 billion If real output is currently less than the natural level of real output, which of the following will result from an increase in aggregate demand? It will make the current recessionary gap smaller. It...

Income (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000...

Income (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000 $11,000 $2,500 $5,000 $12,500 12,000 14,000 2,500 5,000 12,500 20,000 20,000 2,500 5,000 12,500 30,000 27,500 2,500 5,000 12,500 50,000 42,500 2,500 5,000 12,500 100,000 80,000 2,500 5,000 12,500 1. Calculate savings, autonomous consumption, MPC, MPS, break even income, and the equilibrium level of income (Y = AE = C + I + G + NX) in the above given information. 2. Draw a...

Income (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000...

Income (Yd) Consumption Expenditure Saving Investment Expenditure Government Expenditure Net Export Expenditure Aggregate Expenditure $8000 $11,000 $2,500 $5,000 $12,500 12,000 14,000 2,500 5,000 12,500 20,000 20,000 2,500 5,000 12,500 30,000 27,500 2,500 5,000 12,500 50,000 42,500 2,500 5,000 12,500 100,000 80,000 2,500 5,000 12,500 Calculate savings, autonomous consumption, MPC, MPS, break even income, and the equilibrium level of income (Y = AE = C + I + G + NX) in the above given information. Draw a graph showing...

Problem 4 Consider the following economy: Consumption Expenditure 446,832 million Planned Investment Expenditure 346,877 million Government...

Problem 4 Consider the following economy: Consumption Expenditure 446,832 million Planned Investment Expenditure 346,877 million Government Expenditure 446,832 million Exports 402,443 million Imports 388,374 million Marginal Propensity to Save 0.3 Marginal Tax Rate 0.32 Autonomous Taxes 301,240 million Marginal Propensity to Import (nx) 0.04 (e) Calculate the marginal leakage rate. (0.5 mark) (f) Assume that the natural rate of output for this economy is estimated as $1,200,000 million. (i) Is this economy facing a recessionary or inflationary gap? (0.5 mark) (ii) Illustrate...

The 2019 Zambian economy shows that the autonomous consumption expenditure is K185 million and the marginal...

The 2019 Zambian economy shows that the autonomous consumption expenditure is K185 million and the marginal propensity to save is 0.25. Investment function (I)=150+0.125y-10i, government expenditure is K100 million, and net taxes are K80 million. The report shows that investment, government expenditure and taxes are constant. The Central Bank indicated that the money markets are influenced by the money demand function M^d=300+Y-10i and money supply function M^s=350+90i. The statistics show that Zambian economy was not trading with the rest of...

Aggregate expenditure equals: A) Consumption + Investment + Government purchases + Transfers B) Consumption + Investment...

Aggregate expenditure equals: A) Consumption + Investment + Government purchases + Transfers B) Consumption + Investment + Government purchases + Net exports C) Consumption + Investment + Federal government purchases + Exports D) Consumption + Government purchases – Net exports As the real interest rate rises: I. consumption rises. II. net exports fall. III. investment rises. A) II only B) I only C) I and III D) III only When the real interest rate rises in the United States, there...

Discuss which of the following fall into the categories of consumption, investment, government expenditure and net...

Discuss which of the following fall into the categories of consumption, investment, government expenditure and net exports from the Y = C + I + G + NX (X – M) identity, and whether the impact is to increase or decrease GDP. (a) Charles buys a second-hand textbook from Tim. (b) When Charles bought the book, he paid Sarah $10 to collect it from Tim. (c) Thomas buys a new house (d) Your firm sells meat to Indonesia (e) The...

Discuss which of the following fall into the categories of consumption, investment, government expenditure and net...

Scenario: In a closed economy without a government, the consumption expenditure equals $5,000 and the investment...

Scenario: In a closed economy without a government, the consumption expenditure equals $5,000 and the investment expenditure equals $2,000. Refer to the scenario above. If the population of the economy is 200, the per capita national income is ________. Group of answer choices $35 $17 $50 $10 A hypothesis states that religious teachings, family ties, and/or social norms are the causes of economic prosperity. According to this hypothesis, ________. geography is a fundamental cause of prosperity culture is a proximate...

Subjects