Question

Question 4 (15 points) 11 the relationship between consumption (C) and income (Y) changes to: C = $100 + .50 * Y and investment = $100 What are the new values of the MPC and MPS? What is the new value of the multiplier? What are the new numerical values for points A, B, C and D on the following graph? If the full employment level of income remains at is $1000 - what level of government spending is now needed to move the economy to full employment? Aggregate Expenditure 45 degree line - C+1 C D Real GDP

Answer 1

Answer

The MPC is the coefficient of the Y in the consumption function

MPC=0.5

MPS=1-MPC=1-0.5=0.5

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Multiplier =1/MPS=1/0.5=2

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B=autonomous consumption and it is the constant in the consumption function

B=100

A=B+I=100+100=200

C is the point where consumption equal the real GDP means Y

Y=C

Y=100+0.5Y

Y-0.5Y=100

0.5Y=100

Y=200=C

The C is 200

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The demand is

Y=C+I

Y=100+0.5Y+100

0.5Y=200

Y=400=D

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Required government spending =required change in real GDP/multiplier

= (1000-400)/2

=$300

The spending should be $300 to the economy be at full employment level.