Question

Suppose the marginal propensity to consume if 0.75 and autonomous consumption (consumption at zero income) is $4,000. If income is $50,000, consumption spending is a. $37,500 b. $41,500 C. $45,500 d. $54,000 QUESTION 4 If the consumption function for an economy is C = 180 + 75 Yd (disposable income) and spending increases by $800, then the resulting change in national income is a. +$2,800 OOO b. 5-3,200 c. $-2,800 d. $+3,200 QUESTION 5 Assume the actual GDP is $4800 and the potential GDP is $4400. The economy's MPC is.75. What should the government do to eliminate the gap? a. raise taxes by $100 b. cut taxes by $75 C. increase government spending by $100 d. decrease government spending by $100

Answer 1

(3) Consumption function: C = c + MPC (Yd)

Where 'c' is autonomous consumption

MPC is marginal propensity to consume.

Yd is disposable income.

C= $4000 + 0.75 ($50000) (Yd = Y, when tax is zero)

C = $4000 + $37500

C = $41500

Consumer spending is $41500

Answer: Option (B)

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(4) C = 180 + 0.75 Yd

MPC = dC / dYd

MPC = 0.75

Spending multiplier = 1 / (1-MPC)

Spenidng multiplier = 1 / (1-0.75)

Spending multiplier = 4

Spending multiplier = (Change in national income / Change in spending)

4 = (Change in national income / $800)

Change in national income = $800 * 4

Change in national income = $3200

Answer: Option (D)

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(5) Actual GDP =$4800

Potential GDP = $4400

Output gap = Actual GDP - Potential GDP

Output Gap = $400

There is a need to decrease the actual GDP by $400 in order to eliminate the output gap.

Multiplier = 1 / (1 - MPC)

Multiplier = 1 / (1-0.75)

Multiplier = 1 / 0.25

Multiplier = 4

Multiplier = (Change in GDP / Change in government spending)

4 = (-$400 / Change in government spending)

Change in government spending = -$400 / 4

Change in government spending = -$100

There is a need to decrease the government spending by $100

Answer: Option (D)