Macroeconomics Answers

7. Give ( a ) the common sense, ( b ) the arithmetic, and ( c ) the geometry of the multiplier. What are the multipliers for MPC = 0.9?0.8? 0.5?

6. Reconstruct Table 22-2 assuming that planned investment is equal to ( a) $300 billion and ( b) $400 billion.
What is the resulting difference in GDP? Is this difference greater or smaller than the change in I? Why? When I drops from $200 billion to $100 billion, how much must GDP drop?

5. Define carefully what is meant by equilibrium in the multiplier model. For each of the following, state why the situation is not an equilibrium. Also describe how the economy would react to each of the situations to restore equilibrium.
a. In Table 22-2, GDP is $3300 billion.
b. In Figure 22-7, actual investment is zero and output is at M.
c. Car dealers find that their inventories of new cars are rising unexpectedly.

4. In the simple multiplier model, assume that investment is always zero. Show that equilibrium output in this special case would come at the break-even point of the consumption function. Why would equilibrium output come above the break-even point when investment is positive?

9. Using the augmented investment demand schedule from question 8(c) and assuming that the interest rate is 10 percent, calculate the level of investment for cases a through d in question 8.

8. What would be the effects of the following on the investment demand function illustrated in Table 21-5 and Figure 21-8?
a. A doubling of the annual revenues per $1000 invested shown in column (3)
b. A rise in interest rates to 15 percent per year
c. The addition of a ninth project with data in the first three columns of ( J, 10, 70)
d. A 50 percent tax on net profi ts shown in columns (6) and (7)

7. à ¢ € œChanges in disposable income lead to movements along the consumption function; changes in wealth or other factors lead to a shift of the consumption function.à ¢ €  Explain this statement with an illustration of each case.

6. ⠀ œAlong the consumption function, income changes more than consumption.⠀  What does this imply for the MPC and MPS?

5. Estimate your income, consumption, and saving for last year. If you dissaved (consumed more than your income), how did you fi nance your dissaving? Estimate
the composition of your consumption in terms of each of the major categories listed in Table 21-1.

4. I consume all my income at every level of income. Draw my consumption and saving functions. What are my MPC and MPS?