Question

Please answer all the questions. Thank you

1. Use the following data to answer the questions below:

Column 1	Column 2	Column 3
Y in $	C in $
0	500
500	850
1,000	1,200
1,500	1,550
2,000	1,900
2,500	2,250
3,000	2,600

1. What is mpc and mps? Compute mpc and mps.

2. Assume investment equals $ 100, government spending equals $ 75, exports equal $ 50 and imports equal $ 35. Compute the aggregate expenditure in column 3.

3. Draw a graph using the above data with income on the horizontal axis and aggregate expenditures on the vertical axis. Draw the aggregate expenditures curve / line and the 45 º line. Label the curves / lines carefully. Mark equilibrium.

2. Answer the following questions based on the information given below:

Autonomous consumption = $ 10 billion; autonomous investment = $ 40 billion; autonomous government spending = $ 35 billion; autonomous taxes = $ 30 billion; autonomous exports = $ 20 billion; autonomous imports = $ 25 billion and marginal propensity to save = 0.4.

1. Write out the consumption function using the above information.
2. Find equilibrium output. Please show your work.

Answer 1

According to the question,

1. MPC is the marginal propensity to consume and it is defined as a change in consumption due to change in income.

MPC = change in consumption/ change in income

MPS is marginal propensity to save and it is defined as a change in savings due to change in income.

Relationship between MPS and MPC : MPS +MPC = 1

Change in consumption = $350

Change in income = $500

MPC = 350/500 = 0.7

MPS = 1-MPC = 0.3

2. Aggregate expenditure = C+I+G+ (X-M)

Column 1	Column 2						Column 3
Y in $	C in $	I in $	G in $	X in $	M in $		AE in $
0	500	100	75	50	35	15	690
500	850	100	75	50	35	15	1040
1,000	1,200	100	75	50	35	15	1390
1,500	1,550	100	75	50	35	15	1740
2,000	1,900	100	75	50	35	15	2090
2,500	2,250	100	75	50	35	15	2440
3,000	2,600	100	75	50	35	15	2790

3)

4) Autonomous consumption = $ 10 billion; autonomous investment = $ 40 billion; autonomous government spending = $ 35 billion; autonomous taxes = $ 30 billion; autonomous exports = $ 20 billion; autonomous imports = $ 25 billion and marginal propensity to save = 0.4.

C= a + cYd

Yd - disposal income - Y-T

c- mpc

mps = 0.4

mpc = 1-mps

c= mpc = 1-0.4=0.6

C= 10 + 0.6 (Y- T)

Y = C+I+G+ (X-M)

Y = 10 + 0.6 (Y- 30) + 40 +35 + (20-25)

Y = 10 + 0.6Y - 18 + 75 -5

Y -0.6Y = 75 -23

0.4 Y = 52

Y = 52/0.4 = $130 billion