MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Question
Chapter P4, Problem 3KC
To determine
The ratio of change in the GDP to an initial change in aggregate expenditure.
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Aggregate Variables
Value (in billions of dollars) in the base year
Consumption spending
$900
Investment spending
$400
Government spending
$200
Transfer payments
$60
The marginal propensity to save is equal to 0.4 and there are no exports or imports,
(a) Calculate the real GDP in this country, Show your work
(b) Calculate the marginal propensity to consume Show your work.
(c) Suppose that the government increases spending from $200 billion to $300 billion
(i) Calculate the maximum change in real GDP. Show your work
(ii) Given the change in real GDP in part (c)(i), calculate the maximum level of the new equilibrium real GDP. Show your work
(d) Suppose that taxes decrease by $100 billion. Will the maximum change in real GDP be larger than, smaller than, or equal to the change in part (c)(i)? Explain.
1. (a) The following equations describe an economy:
C = 100+ 0.75Yd
I = 50-25r
T = G = 50
Where C is aggregate consumption, Ya is disposable income, I is aggregate
investment. T'is taxes, G is government purchases and r is the rate of interest.
Derive the IS curve for the economy. Show the area of excess demand and
excess supply in the goods market.
(b) Draw the graph and explain the derivation of IS curve.
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