Given the information below, answer the questions that follow. C = $40 + 0.8Y I = $30 G = $40 X – M = -$10 a) What is the equilibrium GDP? Explain why $550 is not the equilibrium. b) What is the marginal propensity to consume (MPC) in this question? (Explain) c) What is the multiplier in this question and explain the significance of the multiplier? (Show all work)

Given the information below, answer the questions that follow. C = $40 + 0.8Y I = $30 G = $40 X – M = -$10 a) What is the equilibrium GDP? Explain why $550 is not the equilibrium. b) What is the marginal propensity to consume (MPC) in this question? (Explain) c) What is the multiplier in this question and explain the significance of the multiplier? (Show all work)

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section11.B: Algebraic Treatment Of Taxes And Fiscal Policy

Problem 1TY

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Question

Given the information below, answer the questions that follow.

C = $40 + 0.8Y I = $30 G = $40 X – M = -$10

a) What is the equilibrium GDP? Explain why $550 is not the equilibrium.

b) What is the marginal propensity to consume (MPC) in this question? (Explain)

c) What is the multiplier in this question and explain the significance of the multiplier? (Show all work)

d) Assuming that the full employment level of output is $600, what kind of gap exists and how large is it? Explain

e) If transfer payments increased by $10 and the price level did not change, what would the new equilibrium be? (Show all work)

f) How would your answer to part (e) change if the price level did change?

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