Subpart (a):
Equations describing the economy.
Subpart (a):
Explanation of Solution
Concept introduction:
Consumption spending: Consumption spending refers to the amount of expenditure incurred for consuming goods and services at a particular tie period with the given level of income.
Investment: An investment is the money invested in terms of assets and buildings by the individual, for future consumption and profit making.
GDP (Gross domestic product): GDP refers to the market value of all final goods and services produced in an economy during an accounting year.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at a constant
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level, due to the changes that have occurred in the income level.
Subpart (b):
Equations describing the economy.
Subpart (b):
Explanation of Solution
The slope of the consumption function is the marginal propensity to consume (MPC). Since the consumption function is
Concept introduction:
Consumption spending: Consumption spending refers to the amount of expenditure incurred for consuming goods and services at a particular tie period with the given level of income.
Investment: An investment is the money invested in terms of assets and buildings by the individual, for future consumption and profit making.
GDP (Gross domestic product): GDP refers to the market value of all final goods and services produced in an economy during an accounting year.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at a constant price rate. A multiplier is positively related to the marginal propensity to consume and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level, due to the changes that have occurred in the income level.
Subpart (c):
Equations describing the economy.
Subpart (c):
Explanation of Solution
Since the interest rate r is 4 percent, the GDP can be equated as follows:
The GDP is 1800. The calculated GDP
Concept introduction:
Consumption spending: Consumption spending refers to the amount of expenditure incurred for consuming goods and services at a particular tie period with the given level of income.
Investment: An investment is the money invested in terms of assets and buildings by the individual, for future consumption and profit making.
GDP (Gross domestic product): GDP refers to the market value of all final goods and services produced in an economy during an accounting year.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at a constant price rate. A multiplier is positively related to the marginal propensity to consume and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level, due to the changes that have occurred in the income level.
Subpart (d):
Equations describing the economy.
Subpart (d):
Explanation of Solution
Assuming no change in
Since the MPC is 0.75, the multiplier can be calculated thus
The multiplier is 4. Thus, to increase GDP by 200
Concept introduction:
Consumption spending: Consumption spending refers to the amount of expenditure incurred for consuming goods and services at a particular tie period with the given level of income.
Investment: An investment is the money invested in terms of assets and buildings by the individual, for future consumption and profit making.
GDP (Gross domestic product): GDP refers to the market value of all final goods and services produced in an economy during an accounting year.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at a constant price rate. A multiplier is positively related to the marginal propensity to consume and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level, due to the changes that have occurred in the income level.
Subpart (e):
Equations describing the economy.
Subpart (e):
Explanation of Solution
Assuming no change in fiscal policy, a decrease in interest rate would restore full employment. The amount at which the interest rate needs to be decreased can be calculated as follows:
The interest rate needs to be 3 percent for full employment. Thus, a decrease of 1 percent
Concept introduction:
Consumption spending: Consumption spending refers to the amount of expenditure incurred for consuming goods and services at a particular tie period with the given level of income.
Investment: An investment is the money invested in terms of assets and buildings by the individual, for future consumption and profit making.
GDP (Gross domestic product): GDP refers to the market value of all final goods and services produced in an economy during an accounting year.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at a constant price rate. A multiplier is positively related to the marginal propensity to consume and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level, due to the changes that have occurred in the income level.
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Chapter 16 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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