Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Book Icon
Chapter 16, Problem 11PA

Subpart (a):

To determine

Equations describing the economy.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

Y=C+I+G : Output is the summation of consumption, investment, and government expenditure. The equation explains the equilibrium condition for GDP or output in a closed economy.

C=100+0.75(Y-T) : The equation implies the consumption as a function of disposable income.

I=500-50r : The equation represents the investment as a function of the interest rate.

G=125 : The equation means that the government expenditure is fixed at 125.

T=100 : The equation means that the taxes are fixed at 100.

Economics Concept Introduction

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 (b):

To determine

Equations describing the economy.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

The slope of the consumption function is the marginal propensity to consume (MPC). Since the consumption function is C=100+0.75(Y-T) , the MPC is 0.75.

Economics Concept Introduction

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):

To determine

Equations describing the economy.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

Since the interest rate r is 4 percent, the GDP can be equated as follows:

Y = C + I + GY = 100 + 0.75 (Y- 100) + 500 - (50×4) + 125Y = 450 + 0.75 YY= 4500.25=1800

The GDP is 1800. The calculated GDP (1800) is less than full employment level GDP (2000) .

Economics Concept Introduction

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):

To determine

Equations describing the economy.

Subpart (d):

Expert Solution
Check Mark

Explanation of Solution

Assuming no change in monetary policy, an increase in government spending would restore full employment. The amount at which government purchases need to be increased can be calculated as follows:

Since the MPC is 0.75, the multiplier can be calculated thus

Multiplier=11MPC=110.75=10.25=4

The multiplier is 4. Thus, to increase GDP by 200 (20001800) , the government spending needs to be increased by 50 (2004) .

Economics Concept Introduction

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):

To determine

Equations describing the economy.

Subpart (e):

Expert Solution
Check Mark

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:

2000=100+0.75(2000100)+ 500 - 50r + 12550r = 100 + 1500 -75 +500 +125 - 2000 r = 15050 r = 3

The interest rate needs to be 3 percent for full employment. Thus, a decrease of 1 percent (43) in the interest rate is required.

Economics Concept Introduction

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
C1 The following model can be used to study whether campaign expenditures affect election outcomes: voteA = 0 + B₁ log(expendA) + ẞ₂ log(expendB) + ẞ3 prtystrA + u, where voteA is the percentage of the vote received by Candidate A, expendA and expend are campaign expenditures by Candidates A and B, and prtystrA is a measure of party strength for Candidate A (the percentage of the most recent presidential vote that went to A's party). == (i) (ii) (iii) (iv) What is the interpretation of B₁? In terms of the parameters, state the null hypothesis that a 1% increase in A's expenditures is offset by a 1% increase in B's expenditures. Estimate the given model using the data in VOTE1.DTA and report the results in usual form. Do A's expenditures affect the outcome? What about B's expenditures? Can you use these results to test the hypothesis in part (ii)? Estimate a model that directly gives the t statistic for testing the hypothesis in part (ii). What do you conclude? (Use a two-sided…
In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all.  10. What is Tinbergen’s constraint? Explain its importance in regard to US monetary policy.
In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all.  8. How does monetary policy supposedly translate into changes in AD?
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
MACROECONOMICS
Economics
ISBN:9781337794985
Author:Baumol
Publisher:CENGAGE L
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Economics:
Economics
ISBN:9781285859460
Author:BOYES, William
Publisher:Cengage Learning
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning