Consider the diagram below, which applies to a nation with no government spendin

Question

Consider the diagram below, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram to answer the following questions, and explain your answers. (I need help understanding the question for the information on the site is not correct. Please do not use the answer on the site as it is not correct. Show all work).

a. What is the marginal propensity to save?

b. What is the present level of planned investment spending for the present period?

c. What is the equilibrium level of real GDP for the present period?

d. What is the equilibrium level of saving for the present period?

e. If planned investment spending for the present period increases by $25 billion, what will be the resulting change in equilibrium real GDP? What will be the new equilibrium level of real GDP if other things, including the price level, remain unchanged?

Explanation / Answer

a. From the graph we see that consumption rises from 0.5 to 2.0 when income rises from 0 to 2.0. This implies that MPC = 1.5/2.0 = 0.75. Hence marginal propensity to save is 1 - MPC = 0.25

b. The present level of planned investment spending for the present period is the difference between C + I and C which is 0.5 trillion

c. The equilibrium level of real GDP for the present period is where C + I = Y. This implies real GDP is 4.0 trillion

d. At the equilibrium, consumption is 3.50 so the equilibrium level of saving for the present period is 0.5 trillion

e. If planned investment spending for the present period increases by $25 billion and that the multiplier is 1/1-MPC or 1/0.25 = 4, the resulting change in equilibrium real GDP will be 4*25 = 100 billion. Then, the new equilibrium level of real GDP if other things, including the price level, remain unchanged, will be 4.1 trillion.

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