Please answer and show your work 1.. By how much will GDP change if firms increa
ID: 1203988 • Letter: P
Question
Please answer and show your work
1.. By how much will GDP change if firms increase their investment by $11 billion and the MPC is 0.8
Instructions: Round your answers to the nearest whole number.
The change in GDP = $ billion.
b. If the MPC is 0.5?
The change in GDP = $ billion.
Suppose that a certain country has an MPC of 0.8 and a real GDP of $500 billion. If its investment spending decreases by $12 billion, what will be its new level of real GDP?
Instructions: Round your answer to the nearest whole number.
Real GDP = $ billion.
2.
ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption is:
C = 50 + 0.9Y
Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real output produced
like emoticon is equal to aggregate expenditures:
Y = C + Ig + G + Xn
Instructions: Round your answers to the nearest whole number.
a. What is the equilibrium level of income or real GDP for this economy?
Equilibrium GDP
like emoticon = $.
b. What happens to equilibrium Y if Ig changes to 10?
Equilibrium GDP like emoticon = $.
What does this outcome reveal about the size of the multiplier?
3.
Answer the following questions, which relate to the aggregate expenditures model:
a. Given the following:
Ca = $100,
Ig = $50,
Xn = $10, and
G = $30,
What is the economy’s equilibrium GDP?
Instructions: Enter your answer as a whole number.
Equilibrium GDP = $.
b. If real GDP in an economy is currently $200, will the economy’s real GDP rise, fall, or stay the same?
.
c. Suppose that full-employment (and full-capacity) output in an economy is $200. If
Ca = $150,
Ig = $50,
Xn = $10, and
G = $30,
What will be the macroeconomic result?
4.
Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy’s multiplier is 3.
a. If household wealth falls by 4 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level?
by $ billion.
b. In what direction and by how much will it eventually shift?
by $ billion.
5.
Suppose that the table below shows an economy’s relationship between real output and the inputs needed to produce that output:
Input Quantity Real GDP 300.00 $400 225.00 300 150.00 200
Instructions: Round your answers to 2 decimal places.
a. What is the level of productivity in this economy?
.
b. What is the per-unit cost of production if the price of each input unit is $3?
$.
c. Assume that the input price increases from $3 to $4 with no accompanying change in productivity. What is the new per-unit cost of production?
$.
In what direction would the $1 increase in input price push the economy’s aggregate supply curve?
The aggregate supply curve would shift to the .
What effect would this shift of aggregate supply have on the price level and the level of real output? .
d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 75% percent.
Instructions: Round your answer to 3 decimal places.
What would be the new per-unit cost of production?
$.
What effect would this change in per-unit production cost have on the economy’s aggregate supply curve?
The aggregate supply curve will shift to the .
What effect would this shift of aggregate supply have on the price level and the level of real output? .
6.
ssume that a hypothetical economy with an MPC of 0.9 is experiencing severe recession.
Instructions: In part a, round your answers to 2 decimal places. Enter positive numbers. In part b, enter your answers as whole numbers.
a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? $ billion.
How large a tax cut would be needed to achieve the same increase in aggregate demand? $ billion.
b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.
Increase spending by $ billion.
Increase taxes by $ billion.
7.
Suppose that a country has no public debt in year 1 but experiences a budget deficit of $20 billion in year 2, a budget deficit of $30 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.
a. What is the absolute size of its public debt in year 5?
Instructions: Enter your answer as a whole number. Do not include a plus or minus sign.
Public Debt = $ billion.
b. If its real GDP in year 5 is $104 billion, what is this country’s public debt as a percentage of real GDP in year 5?
Instructions: Round your answer to 2 decimal places.
Public Debt = percent.
8.
Suppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?
Instructions: Enter your answer as a whole number.
$ billion.
Explanation / Answer
(1) Multiplier = 1 / (1 - MPC)
(a)
Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5
So, As investment increases by $1, GDP increases by $5.
As investment increases by $11 billion, GDP rises by $11 billion x 5 = $55 billion
(b)
Multiplier = 1 / (1 - 0.5) = 1 / 0.5 = 2
So, As investment increases by $1, GDP increases by $2.
As investment increases by $11 billion, GDP rises by $11 billion x 2 = $22 billion
(c)
Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5
So, As investment increases by $1, GDP increases by $5.
As investment increases by $12 billion, GDP rises by $12 billion x 5 = $60 billion
New GDP = $(500 + 60) billion = $560 billion
NOTE: First question is answered.