Question

y	C	G	I	C+G+I	C+G+I(2)
0	250	100	150	500	550
500	650	100	150	900	950
1000	1050	100	150	1300	1350
1500	1450	100	150	1700	1750
2000	1850	100	150	2100	2150
2500	2250	100	150	2500	2550
3000	2650	100	150	2900	2950
3500	3050	100	150	3300	3350
4000	3450	100	150	3700	3750
4500	3850	100	150	4100	4150

1. The consumption function is C=250+0.8y. How much are a (the intercept) and MPC (Marginal Propensity to Consume)?

2. What is the value of the spending multiplier?

3. How much is equilibrium y?

4. Reduce G to zero. Fill in the new C+G+I(2) (was already done in chart). By how much has equilibrium y changed after G decreased?

Answer 1

1. The consumption function is C=250+0.8y. How much are a (the intercept) and MPC (Marginal Propensity to Consume)= 0.8

Intercept is =$250

2.

MPC=0.8

MPS=1-MPC

=1-0.8

=0.2

Spending multiplier=1/MPS

=1/0.2

=5

3.

Since equilibrium determined by the following condition

Y=C+I+G

Hence equilibrium output (Y) will be $2,500

4.

If G reduces to zero, then New equilibrium will be determined by the following condition

Y=(C+I+G)2

Hence equilibrium (Y) will be 2,000.

New Table.

C 500 100 100 100 G 250 650 6501 1050 1450 1850 22501 2650 30501 3450 3850 100 1000 1500 2000 2500 30001 3500 4000 4500 C+G+1 C+G+ (2) 150 500 400 150 9001 800 150 1300 12001 150 1700 1600 150 2100 2000 1501 2500 2400 150 2900 28001 150 3300 3200 37001 3600 150 4100 4000 100 100 1501