MindTap Economics, 2 terms (12 months) Printed Access Card for Mankiw's Principles of Economics, 8th (MindTap Course List)
MindTap Economics, 2 terms (12 months) Printed Access Card for Mankiw's Principles of Economics, 8th (MindTap Course List)
8th Edition
ISBN: 9781337096539
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Book Icon
Chapter 34, Problem 11PA

(a):

To determine

Meaning of the equation.

(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

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):

To determine

Marginal propensity to consume.

(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

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):

To determine

Compare with full employmnet level.

(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

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):

To determine

Impact of change in government purchase.

(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

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):

To determine

Change in interest rate to bring the economy back to full employment level.

(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

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
Economics Grade 3 CONDUCT RESEARCH ON (the various) MARKET STRUCTURES Research Project/May Explain the concept market structure and explain why there are perfect and imperfect market structures. (5) • Provide reasons as to why the taxi industry is regarded as operating in a monopolistic competitive structure. (10) • How do monopolies impact consumers and the economy. (10) • Use graph(s) to explain the long run equilibrium price and output in a perfect market. (10) • Evaluate the effectiveness of South Africa's competition policy in curbing anticompetitive tendencies in the market. Make use of practical examples. (10) GRAND TOTAL:50 Please turn Copyright
UGD KCQ 2: Microeconomic Essentials (page 11 of 20) - Google Chrome mancosaconnect.ac.za/mod/quiz/attempt.php?attempt=1958913&cmid=436375&page=10 MANCOSA Microeconomic Essentials Jan25 Y1 S1 Back Refer to the diagram below to answer the question that follows: Price PH P1 D₁ ㅁ X Quiz navigation 3 4 5 6 Time left 0:58:34 1 2 Question 11 7 8 Not yet answered Marked out of 1.00 13 33 14 S₁ Flag question Q Q1 Quantity Which of the following may result in a shift of the supply curve from S to S1? OA. An increase in price of the good. B. An increase in wages. O C. A decrease in price of the good. O D. An improvement in the technique of production. https://mancosaconnect.ac.za/mod/quiz/attempt.php?attempt=1958913&cmid=436375&page=10#question-2064270-11 19 20 6 10 10 11 12 15 Question 11- Not yet answered Finish attempt... 7:31 PM
Euros per U.S. Doler Consider the model below, showing the supply and demand curves for the exchange market of U.S. Dollars and Euros. If the inflation rate in the U.S. increases (and in the European Union stays the same), how will that change the original equilibrium shown in the graph? 1.10- 1.00- 0.90 0.80- 0.70 0.60 0.50- 0.40- 0.30 0.20 E 4.7 48 49 50 51 52 53 54 55 56 Quantity of U.S. Dollars traded for Euros (trillionsday) O It will decrease the demand for Dollars and increase the supply, so the exchange rate decreases and the impact on the quantity traded is unknown. O It will decrease the demand for Dollars and increase the supply, so the exchange rate decreases, and the quantity traded increases. It will increase the demand for Dollars and decrease the supply, so the exchange rate decreases, and the quantity traded increases. It will increase the demand for Dollars and decrease the supply, so the exchange rate increases and the impact on the quantity traded is unknown
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