Question

Consider the diagram to the right, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram to answer the following questions. The marginal propensity to save for this economy is .25 Planned C, 1 147 13- 12- 11- F 10- 9-1 The present level of planned investment spending for the present period is $ trillion. The equilibrium level of real GDP for the present period is trillion. 8- 7- G $ 6- 5- 3- 2 The equilibrium level of saving for the present period is $ trillion. If planned investment spending for the present period increases by $25 billion, the resulting change in equilibrium real GDP will be $ trillion. If other things, including the price level, remain unchanged, the new equilibrium level of real GDP will be $1 trillion. 1- Y 0 1 2 4 5 6 7 8 9 10 11 12 13 14 Real GDP ($ trillions)

Answer 1

Seeing the diagram we can say that the marginal propensity to consume for the economy is 0.75,

So, marginal propensity to save for this economy is 0.75

The the present level of planned investment spending for the present period is $1.5 trillions

The the equilibrium level of real GDP for the present period is $10 trillion(given by the intersection of C+I Curve and the 45° line)

The equilibrium level of saving for the present period is= 0.25×$10 trillion= $2.5 trillion.

If planned investment spending for the present period increases by $25 billion, the resulting change in equilibrium real GDP will be= Spending Multiplier×$25 billion= {1/(1–MPC)}×$25 billion= 4×$25 billion= $100 billion= $0.1 trillion

If if other things, including the price level remain unchanged the new equilibrium level of real GDP will be $10.1 trillion.