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Economics 102 Spring 2004 Practice Question 6 Answers 1. Given that C=500+0.8*Y D fill in the table below. Income or GDP Taxes Disposable Income Consumpti on Investment Gov't Purchases Aggregate Expenditure 2,000 1000 1,000 1,300 600 300 2,200 2,500 1000 1,500 1,700 600 300 2,600 3,000 1000 2,000 2,100 600 300 3,000 3,500 1000 2,500 2,500 600 300 3,400 4,000 1000 3,000 2,900 600 300 3,800 4,500 1000 3,500 3,300 600 300 4,200 a. 3,000 b. When GDP is 4,000 inventories are increasing by 200. GDP-AE=4000-3800=200. When GDP is 2,000 inventories are decreasing by 200. 2000-2200=-200. 2. a. MPC=0.75. This tells us that when disposable income increases by one dollar our consumption spending will increase by 75 cents. b.1300, this is the part of consumption spending that is independent of income. If our disposable income was 0 we would still spend 1300 on consumption. c. the consumption income line is the lower one of the two.

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0 2000 4000 6000 8000 10000 12000 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Income Spending d. 8000
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