CH 11 CLASS APPLICATION#3: IMPACTS OF SPENDING SHOCKS ON GDP Table 2: Spending S
ID: 1116302 • Letter: C
Question
CH 11 CLASS APPLICATION#3: IMPACTS OF SPENDING SHOCKS ON GDP Table 2: Spending Shocks -1990 & 2010 (Billions of $$$) Year DI Ca IPG T NX GDP 1990 5,000 3,000900 1,200 1,500 1,000 300 2010 9,000 6,200 1,700 2,200 3,000 2,200 -200 Compute the following items: MPC, MPS, Expenditure Multiplier (mexp), Tax Multiplier (ma), Equilibrium Values of GDP 990 & GDP2010 Compute the impacts on GDP of the following spending shocks: a or autonomous consumption, IP, G, T and NX from 1990 to 2010. What do you conclude about these results? 1. 2. 3. 11/16/2017 11:22 AMExplanation / Answer
(1)
(a) MPC = Change in C / Change in DI = (6,200 - 3,000) / (9,000 - 5,000) = 3,200 / 4,000 = 0.8
(b) MPS = 1 - MPC = 1 - 0.8 = 0.2
(c) mexp = 1 / MPS = 1 / 0.2 = 5
(d) mtax = - MPC / MPS = - 0.8 / 0.2 = - 4
(e) In equilibrium, GDP = C + Ip + G + NX
GDP (1990) = 3,000 + 1,200 + 1,500 + 300 = 6,000
GDP (2010) = 6,200 + 2,200 + 3,000 - 200 = 11,200
(2) Between 1990 and 2010,
(a) a increases by 800 (= 1,700 - 900).
Corresponding increase in GDP = 800 x 5 = 4,000
(b) Ip increases by 1,000 (= 2,200 - 1,200).
Corresponding increase in GDP = 1,000 x 5 = 5,000
(c) G increases by 1,500 (= 3,000 - 1,500).
Corresponding increase in GDP = 1,500 x 5 = 7,500
(d) T increases by 1,200 (= 2,200 - 1,000).
Corresponding decrease in GDP = 1,200 x 4 = 4,800
(e) NX decreases by 500 (= 300 + 200).
Corresponding decrease in GDP = 500 x 5 = 2,500
NOTE: As per Chegg answering guideline, first 2 multi-part sub-parts are answered.