Consider the following table: REAL GDP Consumption$ Saving $ Investment $ 2,000
ID: 1177878 • Letter: C
Question
Consider the following table:
REAL GDP Consumption$ Saving $ Investment $
2,000 2,000 0 1,200
4,000 3,600 400 1,200
6,000 5,200 800 1,200
8,000 6,800 1,200 1,200
10,000 8,400 1,600 1,200
12,000 10,000 2,000 1,200
1. Calculate the marginal propensity to save.
2. Calculate the propensity margin to consume.
3.Calculate the numerical value of the multiplier.
4.Calculate the equilibrium real GDP without investment. What is the multiplier effect from the inclusion of investment?
5.Calculate the average propensity to consume at equilibrium real GDP.
6. If equilibrium real GDP is $8,000 when investment is $400, explain what happens to equilibrium real GDP if autonomous investment declines to $200.
Explanation / Answer
1)mps=400/2000=0.2
2)mpc=1600/2000=0.8
3)1/1-mpc=5
4)$8000
The multiplier effect is the magnified increase in equilibrium GDP that
occurs when any component of aggregate expenditures changes. The
greater the MPC (the smaller the MPS), the greater the multiplier.
5)36000/420000= .8571
6)The equilibrium real GDP will be less than $8000. To know how many real GDP should be, we need marginal propensity to consume or marginal propensity to save. But, at first glance, I guess the real GDP will be $4000, or 8000/2, because the investment is now 400/2=200.