Question

1. Refer the table below and answer the questions that follow. (4 Points) Aggregate Aggregate Aggregate Planned Output Consumption Saving Investment ($ million) Y ($ million) ($ million) ($ million) Aggregate Expenditure AE=C+ 1,500 700 2,000 2,400 2,800 1,800 700 2,100 700 3,200 2,400 700 3,600 2,700 700 a. Fill in the table and find the equilibrium income. b. Find the MPC, MPS and the multiplier. c. If the planned investment increases by $100 million find the new equilibrium level of income.

Answer 1

(a)

Y	C	S	I	AE = C + I
2000	1500	500	700	2200
2400	1800	600	700	2500
2800	2100	700	700	2800
3200	2400	800	700	3100
3600	2700	900	700	3400

Using the formulas:

Y = C + S

and AE = C + I

Equilibrium in the economy is attained at a point where Aggregate output = Aggregate Expenditure

i.e. Y = AE

Thus, equilibrium income, Y = $2800.

(b) The Marginal Propensity to consume i.e. the increase in consumer spending owing to an increase in disposable income, is given by the formula:

MPC = dC/dY

= 300/400 = 0.75

The Marginal Propensity to save i.e. the increase in savings due to an increase in disposable income, is given by the formula:

MPS = dS/dY

= 100/400 = 0.25

Clearly, MPC + MPS = 1

The multiplier in the economy is given as: 1/(1-MPC) = 1/MPS

Thus, multiplier, k = 1/0.25 = 4

Ans. MPC = 0.75, MPS = 0,25, Multiplier = 4

(c) Assuming that planned investment, I increases by $100 million. Thus, new Aggregate expenditure is given by:

Y	C	S	I	AE = C + I
2000	1500	500	800	2300
2400	1800	600	800	2600
2800	2100	700	800	2900
3200	2400	800	800	3200
3600	2700	900	800	3500

Thus, the new equilibrium is attained at the aggregate income level of Y = $3200