Question

Income Or Output Y	Consumption Expenditure         C	Investment Expenditure       I	Government Expenditure          G	Net export Expenditure        NX
$4,000	3,925	100	100	25
4,100	4,000	100	100	25
4,200	4,075	100	100	25
4,300	4,150	100	100	25
4,400	4,225	100	100	25
4,500	4,300	100	100	25
4,600	4,375	100	100	25
4,700	4,450	100	100	25
4,800	4,525	100	100	25
4,900	4,600	100	100	25
5,000	4,675	100	100	25

a) Determine equilibrium level of income?

b) Calculate expenditure multiplier?

c) If government expenditure grows to $150, what will be the new equilibrium level of income?

d) If government expenditure falls to $50, what will be the new equilibrium level of income?

e) Suppose a tax cut of $50 is given with the information given in question1, what will be the new equilibrium level of income after the tax cut?

2. Calculate MPC, MPS and the Multiplier if consumption expenditure increases by $4,250 as a result of increase in income from $40,000 to $45,000.

3. Calculate GDP loss if equilibrium level of GDP is $10,000, unemployment rate 9.8%, and the MPC is 0.90.

Show it with help of a graph taking AE on the vertical axis and income on the horizontal axis.

Answer 1

a) Equilibrium level of income = 4600 because Y = AD or Y = AE

b) Expenditure multiplier = 1/ ( 1 - MPC)

MPC = Change in Consumption / Change in Output = 75/100 = 0.75

Change in consumption is 75 at each output.

Change in output is fixed at 100 units.

Expenditure multiplier = 1/(1 - 0.75) = 1/0.25 = 4

c) New equilibrium level of income is 4800.

d) New equilibrium level of income = 4400

2. MPC = Change in C / Change in Y = 4250/(45000 - 40000) = 4250/5000 = 0.85

MPS = 1 - MPC = 1 - 0.85 = 0.15

Multiplier = 1/MPS = 1/0.15 = 6.67