Question

4. If a drop in government spending of $ 2 billion produces a drop in the economy's real GDP of $ 10 billion, what is the value of that country's PMC?

5. When the price level is fixed and the investment increases by $ 100, the equilibrium expense increases by $ 500.

a. Both the marginal propensity to consume and the multiplier is 0.2
b. The multiplier is 0.2.
c. The multiplier is 5.0.
d. The slope of the GA curve is 0.2.

6. All of the following statements about equilibrium spending are true except:
a. The unplanned investment in inventories is zero.
b. The planned aggregate expense equals the actual expense.
c. Planned aggregate spending equals real GDP.
d. The effective investment is less than the planned investment.

Answer 1

(4) a drop in government spending of $ 2 billion produces a drop in the economy's real GDP of $ 10 billion

=> Δ G = -$2 billion

=> Δ Y = -$10 billion

Multiplier = (ΔY / ΔG)

Multipplier = (-$10 billion / -$2 billion)

Multiplier = 5

Multiplier = 1 / MPS

=> 5 = 1 / MPS => MPS = 1 / 5 => MPS = 0.2

MPC = 1 - MPS

=> MPC = 1 - 0.2

=> MPC = 0.8

Answer: MPC = 0.8

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(5) price level is fixed and the investment increases by $ 100, the equilibrium expense increases by $ 500.

=> Δ I = $100

=> Δ Y = $500.

Note: Change in Investment or change in government expenditure are considered as change in autonomous expenditure. Multiplier measure the change in autonomous expenditure on equilibrium income (expenses)

Multiplier = ΔY / ΔI

=> Mmultiplier = $500 / $100

=> Multiplier = 5

Multiplier = 1 / MPS

=> 5 = 1 / MPS => MPS = 1 / 5 => MPS = 0.2

MPC = 1 - MPS

=> MPC = 1 - 0.2

=> MPC = 0.8

Answer: Option (C)

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(6) At equilibrium spending following holds true:

• unplanned investment in inventories is zero.
• planned aggregate expenses equals the actual expenses.
• planned aggregate spending equals real GDP.
• the effective investment is equal to planned investment.

Answer: Option (D)