Macroeconomics
Macroeconomics
5th Edition
ISBN: 9781319098759
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 13, Problem 5P
To determine

Concept Introduction:

Marginal Propensity to Consume ( MPC ):

It overall raise is that proportion of amount which the consumer pay for consumption of goods and services, and it does not include the savings of the consumer.

Effect on government spending, consumption spending, gross domestic product and disposable income in each case.

Expert Solution & Answer
Check Mark

Explanation of Solution

a.

Given,

MPC is 0.6.

Formula to calculate change in consumption is,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  1

Change in consumption in round three,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  2

Similarly further change in consumption will be calculated in the table.

Formula to calculate change in real GDP is,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  3

With $10 billion reduction in government purchases:

    Rounds Change in G or C (billions of dollar) Change in real GDP(billions of dollar) Change in YD (billions of dollar)
    1 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  4-10 -10
    2 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  5-6 -6
    3 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  6-3.60 -3.60
    4 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  7-2.16 -2.16
    5 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  8-1.30 -1.30
    6 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  9-0.78 -0.78
    7 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  10-0.47 -0.47
    8 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  11-0.28 -0.28
    9 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  12-0.17 -0.17
    10 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  13-0.10 -0.10
    Total -24.86
    Table(1)

b.

With decrease in government transfers:

    Rounds Change in TR or C (billions of dollar) Change in real GDP(billions of dollar) Change in YD (billions of dollar)
    1 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  140 -10
    2 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  15-6 -6
    3 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  16-3.60 -3.60
    4 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  17-2.16 -2.16
    5 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  18-1.30 -1.30
    6 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  19-0.78 -0.78
    7 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  20-0.47 -0.47
    8 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  21-0.28 -0.28
    9 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  22-0.17 -0.17
    10 Macroeconomics, Chapter 13, Problem 5P , additional homework tip  23-0.10 -0.10
    Total -14.86
    Table(2)

c.

Given,

MPC is 0.6.

Change in real GDP when there is decrease in government spending:

Formula to calculate change in real GDP when there is decrease in government spending is,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  24(I)

Substitute 0.6 for MPC and -$10 billion for change in spending in equation (I).

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  25

Change in real GDP when there is decrease in government transfers:

Formula to calculate change in real GDP when there is decrease in government transfers is,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  26

Substitute 0.6 for MPC and -$10 billion for change in spending in equation (I).

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  27

There is no change in real GDP in the first round so the difference in change in real GDP will be -$10 billion.

Formula to calculate difference between the two GDP is,

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  28

Substitute -$25 for change in real GDP when government reduces spending and -$15 billion for change in real GDP when government transfers falls.

Macroeconomics, Chapter 13, Problem 5P , additional homework tip  29

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