Question

Table 2: All figures in Billions of Dollars

Aggregate Output/Income	Aggregate Consumption	Planned Investment	Saving	Govt. Spending	Net Taxes
1,000	680	200	120	200	200
1,100	760	200	140	200	200
1,200	840	200	-	200	200
1,300	-	200	180	200	200
1,400	1,000	200	-	200	200
1,500	1,080	200	220	200	200
1,600	-	200	240	200	200

Please show calculation.

a.        Complete the table and determine 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.      If the level of planned investment increased to $40b, what would be the new equilibrium level of output?  

Answer 1

Aggregate Output/Income	Aggregate Consumption	Planned Investment	Saving	Govt. Spending	Net Taxes
1,000	680	200	120	200	200
1,100	760	200	140	200	200
1,200	840	200	160	200	200
1,300	920	200	180	200	200
1,400	1,000	200	200	200	200
1,500	1,080	200	220	200	200
1,600	1,160	200	240	200	200

B) Marginal propensity to consume= 0.8

Formula= Marginal propensity to consume= Change in consumption / change in income

Marginal propensity to consume= 80/ 100

Marginal propensity to consume= 0.8

Marginal propensity to save =0.2

Marginal propensity to save = Change in saving / change in income

Marginal propensity to save =20/100

Marginal propensity to save =0.2

C) Equilibrium level of Income=1400

D) Multiplier= 5

Formula= 1/ 1-MPC                         (Given MPC= 0.8)

Multiplier= 1/1-0.8

Multiplier = 1/0.2

Multiplier= 5

E) If the level of planned investment increased to $40b, then planned investment will be 240 and saving is equal to planned investment at 1,600 output. Then, 1,600 would be the new equilibrium level of output.