(a):
Meaning of the equation.
(a):
Explanation of Solution
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.
(b):
Marginal propensity to consume.
(b):
Explanation of Solution
The slope of the consumption function is the marginal propensity to consume (MPC). Since the consumption function is
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.
(c):
Compare with full employmnet level.
(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
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.
(d):
Impact of change in government purchase.
(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
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.
(e):
Change in interest rate to bring the economy back to full employment level.
(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
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 34 Solutions
PRINC OF ECONOMICS PKG >CUSTOM<
- Wolfgang is a typical producer in a perfectly competitive piano industry (i.e., all other producers of pianos face the same costs as Wolfgang). The following production and cost data apply to the long run as well as the short run. Fixed costs (rent) are unrecoverable in the short run and are equal to $2400 per month. Variable costs consist of raw materials (wire, wood, plastic), which cost $1000 per piano, and the $40 per hour opportunity cost of Wolfgang's time. Wolfgang's production function is given in the table at right. Wolfgang will shut down if the price per piano is less than OA. $3000. B. $4000. O C. $5000. ○ D. None of the above. Pianos (Q) Hours (L) Raw Materials ( 0 0 0 1 100 1000 2 150 2000 3 240 3000 4 400 4000arrow_forwardP2 P₁ $ per unit Using the graph below, determine which statement is TRUE. MC1 SRATC₁ Q1 Q₂ MC2 SRATC2 LRAC ✓ LEA Quantityarrow_forwardUsing the grapns below, wnicn snow the snort-run cost curves for 3 perfectly competitive firms in the same industry, determine whether the industry is in long-run equilibrium or not. Q Q Firm A QA MC ATC Output Firm B QB MC ATC Firm C MC ATC Output Output Qc If Firms A, B and C are in the same industry, is this industry in long-run equilibrium? ○ A. Yes, because P = MC = MR for each of the 3 firms. ○ B. No, because Firm A is not producing at a profit-maximizing level of output. ○ C. Yes, because all 3 firms are producing at their minimum average total cost. OD. The answer is uncertain since it's unknown whether the firms are producing at the minimum efficient scale or not. ○ E. No, because if the industry were in equilibrium, all 3 firms would be earning zero economic profits.arrow_forward
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