Question

In: Economics

Assume that the MPS in an economy is equal to 0.10. The multiplier must be equal...

Assume that the MPS in an economy is equal to 0.10. The multiplier must be equal to 10.00.

1.You have established that the multiplier is 10.00. Now assume that autonomous real consumption is $3 trillion.

There is no other autonomous spending presently taking place in the economy. At what level is consumption equal to real GDP?

$____trillion. (Round your answer to two decimal places)

2. You have established that the multiplier is 10.00 and that autonomous real consumption is $3 trillion.

There is autonomous investment of $4 trillion and autonomous net exports of $11 trillion. At what level are expenditures equal to real GDP?

$___trillion. (Round your answer to two decimal places)

Expert Solution

MPC = 1 - MPS = 1 - 0.1 = 0.9

(1)

Consumption (C) = C0 + MPC x Y = 3 + 0.9Y where C0: autonomous consumption

Equating C with Y,

3 + 0.9Y = Y

0.1Y = 3

Y = $30.00 trillion

(2)

Expenditure (AE) = C + Autonomous investment + Autonomous net exports = 3 + 0.9Y + 4 + 11 = 18 + 0.9Y

Equating Y and AE,

Y = 18 + 0.9Y

0.1Y = 18

Y = $180.00 trillion

Rahul Sunny answered 2 years ago

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