Question

Table 2: All figures in Billions of Dollars

Aggregate Output/Income	Aggregate Consumption C=100+.9Yd	Planned Investment	Government Purchases	Net Taxes	Aggregate Expenditure	Unplanned Inventory Change
2,400	2,170	130	200	100
2,800	2,530	130	200	100
3,000	2,710	130	200	100
3,200	2,890	130	200	100
3,400	3,070	130	200	100
3,600	3,250	130	200	100
3,800	3,300	130	200	100

a.                Complete the table by determining the aggregate expenditure and the unplanned inventory change at all income levels

b.               Determine the marginal propensity to consume (MPC) and marginal propensity to save.

c.                What is the equilibrium level of income?   

d.               Calculate the value of the multiplier   

e.      What is the level of disposable income at all output levels and what effect would an increase in the tax level have on the equilibrium level of output?

Answer 1

(a)

Aggregate output	Consumption	Planned investment	Government purchases	Net taxes	Aggregate expenditure	Unplanned inventory change
2400	2170	130	200	100	2500	-100
2800	2530	130	200	100	2860	-60
3000	2710	130	200	100	3040	-40
3200	2890	130	200	100	3220	-20
3400	3070	130	200	100	3400	0
3600	3250	130	200	100	3580	20
3800	3300	130	200	100	3630	170

Aggregate expenditure = Consumption + Planned investment + Government purchases

Unplanned inventory changes = Aggregate output - Aggregate expenditure

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(b) C = 100 + 0.9Yd

MPC = ΔC / ΔYd

=> MPC = 0.9

Marginal propensity to consume is 0.9

and, MPC + MPS = 1

=> MPS = 1 - MPC
=> MPS = 1 - 0.9

=> MPS = 0.1

Marginal propensity to save is 0.1

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(c) At equilibrium poin, Aggregate output = Aggregate expenditure.

Thus, the equilibrium level of income is 3400

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(d) Multiplier = 1 / MPS

=> Multiplier = 1/0.1

=> Multiplier =10

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(e)

Aggregate output / income	Net taxes	Disposable income (Yd)
2400	100	2300
2800	100	2700
3000	100	2900
3200	100	3100
3400	100	3300
3600	100	3500
3800	100	3700

Disposable income = Aggregate income - Net taxes.

An increase in net taxes will decrease the disposable income. A decrease in disposable income will decrease the consumption level. A decrease in consumption level will decrease the aggregate expenditure. A decrease in aggregate expenditure will decrease the equilibrium level of output.