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Microsoft Word - Solution-Chapter-11

# Microsoft Word - Solution-Chapter-11 - Chapter 28 1 You are...

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C h a p t e r 2 8 1. You are given the information in the table to the right about the economy of the United Kingdom. a. Calculate the marginal propensity to consume. The marginal propensity to consume is the fraction of a change in disposable income that is consumed. In the United Kingdom, when disposable income increases by £100 billion per year, consumption expenditure increases by £80 billion per year. The marginal propensity to consume equals £80 billion ÷ £100 billion, or 0.8. b. Calculate saving at each level of disposable income. The table to the right shows the United Kingdom’s saving schedule. Saving equals disposable income minus consumption expenditure. c. Calculate the marginal propensity to save. The marginal propensity to save is the fraction of a change in disposable income that is saved. In the United Kingdom, for each increase in disposable income of £100 billion, saving increases by £20 billion, so the marginal propensity to save is £20 billion ÷ £100 billion, which is 0.2. 2. Figure 11.1 illustrates the components of aggregate planned expenditure on Turtle Island. Turtle Island has no imports or exports, the people of Turtle Island pay no income taxes, and the price level is fixed. a. Calculate autonomous expenditure. Autonomous expenditure is \$2 billion. Autonomous expenditure is expenditure that does not depend on real GDP. Autonomous expenditure equals the value of aggregate planned expenditure when real GDP is zero. b. Calculate the marginal propensity to consume. The marginal propensity to consume is 0.6. When the country has no imports or exports and no income taxes, the slope of the AE curve equals the marginal propensity to consume. When income increases from zero to \$6 billion, Disposable income Consumption expenditure (billions of pounds per year) 300 340 400 420 500 500 600 580 700 660 Disposable income Saving (billions of pounds per year) 300 40 400 20 500 0 600 20 700 40

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E X P E N D I T U R E M U L T I P L I E R S : T H E K E Y N E S I A N M O D E L 1 7 0 aggregate planned expenditure increases from \$2 billion to \$5.6 billion. That is, when real GDP increases by \$6 billion, aggregate planned expenditure increases by \$3.6 billion. The marginal propensity to consume is \$3.6 billion ÷ \$6 billion, which is 0.6. c. What is aggregate planned expenditure when real GDP is \$6 billion? Figure 11.1 shows that when aggregate planned expenditure is \$5.6 billion when real GDP is \$6 billion. d. If real GDP is \$4 billion, what is happening to inventories? Firms’ inventories are decreasing. When real GDP is \$4 billion, aggregate planned expenditure exceeds real GDP, so firms sell all that they produce and more. As a result, inventories decrease. e. If real GDP is \$6 billion, what is happening to inventories?
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Microsoft Word - Solution-Chapter-11 - Chapter 28 1 You are...

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