Consider an economy has the following information Find GDP equilibrium numerical
ID: 1213844 • Letter: C
Question
Consider an economy has the following information Find GDP equilibrium numerically and graphically Calculate MPC and Multiplier Assume Government expenditure has increased by 10 Find new equilibrium Numerically Assume: Government cut income taxes by 10. Find new equilibrium Numerically Consider in a given Macroeconomics the following information about Aggregate supply and two aggregate demands (numbers are arbitrary' in billions) Find two equilibriums numerically and graphically. If MPC is equal to 0.90, explain the impact of inflation on spending multiplier, (must calculate realistic and oversimplified multipliers)Explanation / Answer
Part one:
a) Note that the table provides the GDP income and you need to calculate GDP from expenditure using:
Y = C + I + G + X - M. This has been provided in the table below:
GDP Income
Consumption
Investment
Government spending
Exports
Imports
GDP EXP
40
30
9
7
2
4
44
50
38
9
7
2
4
52
60
46
9
7
2
4
60
70
54
9
7
2
4
68
80
62
9
7
2
4
76
90
70
9
7
2
4
84
100
78
9
7
2
4
92
110
86
9
7
2
4
100
120
94
9
7
2
4
108
Observe that when the GDP income is 60, C + I + G + X - M or AE = Y = 60. Hence the equilibrium level of GDP is 60 where Y(Planned) = AE
b) Marginal propencity to consume is the ratio of change in Consumption to change in income. Change in income is 10 at each level and change in consumption is 8 at each level. Henec MPC = 8/10 = 0.8
There are no taxes and import sensitivity so the spending multiplier is 1/1-MPC or 1/1-0.8 = 5.
c) When government increases its expenditure, income increases multiple times, precisely by G/1 – MPC. If the government spending increases by 10, then GDP rises by 10/(1-0.8) = 50. Thus income rises by 50 to become 110.
d) When government decreases taxes, income rises multiple times, precisely by the amount T × MPC/(1 – MPC). This, in turn, suggests that income rises by 10*(0.8)/(1-0.8) = 40. Hence the new equilibrium quantity is 100.
Part two
a) The table suggests that the price level of 48 equates AD1 with AS where both are equal to 140. Similarly, the second equilibrium occurs when the price level is 56 where AD2 with AS where both are equal to 200.
b) As mentioned before, if MPC is 0.9 then spending multiplier is 1/1-MPC or 10. So an increase in investment from 20 to 30, by 10, should increase income (Aggregate demand) by 100. This is oversimplified multiplier. But here AD increases from 140 to 200 since price level also increases from 48 to 56, so that inflation rate is 12.5%. This inflation reduces the value of multiplier from a value of 10 to a value of 6.
GDP Income
Consumption
Investment
Government spending
Exports
Imports
GDP EXP
40
30
9
7
2
4
44
50
38
9
7
2
4
52
60
46
9
7
2
4
60
70
54
9
7
2
4
68
80
62
9
7
2
4
76
90
70
9
7
2
4
84
100
78
9
7
2
4
92
110
86
9
7
2
4
100
120
94
9
7
2
4
108