Question

GDP	C	I	G	AD	IU
		50	10
		50	10
		50	10
300	300	50	10
400	380	50	10
500	460	50	10
600	540	50	10
700	620	50	10	680	20

Questions 1 – 4 are based on this table

1. Fill in the missing data in every empty cell above.                                                         20 pts

2.   Find the MPC and MPS for the above data. Show work!                                              10 pts

3.   Find the formula for Aggregate Demand using the above data and calculate equilibrium GDP.                                                                                                                                               20 pts

4.   Find the multiplier.   If full employment is 700 what is the necessary change in government purchases to move the economy to full employment? Show work!                                               20 pts

Answer 1

1) The table is completed using AD = C + I + G and IU = GDP - AD

GDP	C	I	G	AD	IU
		50	10	60
		50	10	60
		50	10	60
300	300	50	10	360	-60
400	380	50	10	440	-40
500	460	50	10	520	-20
600	540	50	10	600	0
700	620	50	10	680	20

b) MPC is the ratio of change in consumption to change in income. This is (380 - 300)/(400-300) = 0.80. MPS = 1 - MPC = 1 - 0.80 = 0.20

c) AD = C + I + G and here AD = Y = 600. This is the equilibrium income / GDP

d) The multiplier is 1/MPS = 1/0.20 = 5.   If full employment is 700 government needs to increase GDP by 100 (current GDP is 600). Hence the required increase in Government spending is (100/5) = 20