Homework Answers
Answer 4
Multiplier = 1 ÷ (1 – MPC)
= 1 / (1 - 0.9) = 10
Answer 5
A) For this part of the problem, we're given that the change or increase in investment is $8 billion and that the marginal propensity to consume (MPC) is 0.75 (3/4).
When performing calculations that involve the gross domestic product, we can use the GDP equation:
Y = C + I + G + NX
Here, *Y is the GDP that is dependent upon:
- Consumption (C)
- Investment (I)
- Government spending (G)
- Net exports (NX)
This equation plays an important role in solving the given problem because we have to calculate the GDP.
The multiplier is given by 1 / (1 - MPC).
So:
Change in Y = 1 / (1 - MPC) * change in investment (I)
Change in Y = 1 / {1 - (3/4)} * 8
Change in Y = 4 * 8
Change in Y = 32 billion
Thus, this $32 billion will be equal to income.
B) Now, if the MPC is 0.80 (4/5), the change in the GDP is given by:
We have to calculate the change in GDP when the marginal propensity to consume (MPC) is 4/5.
We have that the change in the investment is $8 billion.
Change in Y = 1 / (1 - MPC) * change in investment (I)
Change in Y = 1 / {1 - (4/5)} * 8
Change in Y = 5 * 8
Change in Y = $40 billion
Thus, the change in GDP = $40 billion.
Answer 6
a. I - Increase in price level causes Aggregate demand to increase
b. D - As the interest rates rises investment falls so there would be leftward shift of AD
d. I - Increase in consumption causes to shift AD to the right
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