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Practice - INCOME &acirc;€“ EXPENDITURE

Practice - INCOME &acirc;€“ EXPENDITURE - I NCOME...

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INCOME – EXPENDITURE: Practice Problems – Ch. 11, problems 9, 10. 9. a. GDP YD C Iplan AEplan Iunplan \$0 \$0 \$100 \$300 \$400 - \$400 400 400 400 300 700 - 300 800 800 700 300 1,000 - 200 1,200 1,200 1,000 300 1,300 - 100 1.600 1,600 1,300 300 1,600 0 2,000 2,000 1,600 300 1,900 + 100 2,400 2,400 1,900 300 2,200 + 200 2,800 2,800 2,200 300 2,500 + 300 3,200 3,200 2,500 300 2,800 + 400 b. Consumption function: C = A + MPC * YD. Since YD = 0 -> C = 100, we know that A = 100. MPC = C/ YD = 300/400 = ¾ = 0.75. This means that the consumption function is: C = 100 + 0.75*YD. c. Y* = GDP in equilibrium = 1,600 . That is clear from the table above. When GDP = YD = 1,600, AEplan = GDP, and there is no unplanned change in inventories. d. Multiplier = 1/(1 – MPC) = 1/(1- 0.75) = 4. e. I = - 100. We can either use the table above and insert 200 instead of 300 under Iplan, or we can use the equation for the multiplier effect: GDP = 1/(1-MPC) * I. In this case: GDP = 4 * (- 100) = -400. f. If autonomous consumer spending increases from 100 to 200, autonomous spending will increase by 100. We get the opposite multiplier effect of what we had in e. GDP = 4 * (100) = 400.

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