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Chapter 26: Problem 5

The Bureau of Economic Analysis reported that, in real terms, overall consumer spending increased by \(\$ 66.2\) billion during the second quarter of \(2014 .\) a. If the marginal propensity to consume is \(0.52,\) by how much will real GDP change in response? b. If there are no other changes to autonomous spending other than the increase in consumer spending in part a, and unplanned inventory investment, \(I_{\text {Unplanned }}\), decreased by \(\$ 50\) billion, what is the change in real GDP? c. GDP at the end of the first quarter in 2014 was \(\$ 16,014.1\) billion. If GDP were to increase by the amount calculated in part b, what would be the percent increase in GDP?

Short Answer

Expert verified
Question: Calculate the percent decrease in real GDP from the first quarter to the second quarter of 2014, considering the given data. Answer: The percent decrease in real GDP from the first quarter to the second quarter of 2014 is approximately 0.0974%.

Step by step solution

01

Understand the given data and variables

From the problem, we have the following information: - Increase in consumer spending = \(\$ 66.2\) billion - Marginal propensity to consume (MPC) = \(0.52\) - Decrease in unplanned inventory investment = \(\$ 50\) billion - GDP at the end of the first quarter = \(\$ 16,014.1\) billion
02

Calculate real GDP change due to the marginal propensity to consume (MPC)

To find the real GDP change in response to the increased consumer spending, we'll use the following formula: Real GDP change = Increase in consumer spending x MPC Real GDP change = \((\$ 66.2\) billion) \times 0.52$
03

Calculate the real GDP change

Real GDP change = \((\$ 66.2\) billion) x 0.52 ≈ \$ 34.4$ billion So, the real GDP will change by approximately \(\$ 34.4\) billion.
04

Calculate real GDP change considering autonomous spending and unplanned inventory investment

Now we look at the changes in real GDP due to both increased consumer spending and decreased unplanned inventory investment. We can apply this formula: Real GDP change = (Increase in consumer spending x MPC) - Decrease in unplanned inventory investment Real GDP change = \((\$ 34.4\) billion) - (\$ 50$ billion)
05

Calculate the total change in real GDP

Real GDP change = \(\$ 34.4\) billion - \(\$ 50\) billion = - \(\$ 15.6\) billion So, after considering the changes in autonomous spending and unplanned inventory investment, the real GDP decreased by \(\$ 15.6\) billion.
06

Calculate the percent increase in GDP

Finally, we can calculate the percent increase in GDP by dividing the total change in real GDP from part b by the GDP at the end of the first quarter and multiplying by 100: Percent increase = \(\frac{-\$ 15.6 \,\text{billion}}{\$ 16,014.1 \,\text{billion}} \times 100\)
07

Compute the percentage change

Percent increase ≈ \(-0.0974 \%\) So, the percent increase in GDP is approximately \(-0.0974\%\), which means the GDP decreased by around \(0.0974\%\) from the first quarter to the second quarter of 2014.

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Most popular questions from this chapter

Explain how each of the following actions will affect the level of planned investment spending and unplanned inventory investment. Assume the economy is initially in income-expenditure equilibrium. a. The Federal Reserve raises the interest rate. b. There is a rise in the expected growth rate of real GDP. c. A sizable inflow of foreign funds into the country lowers the interest rate.

An economy has a marginal propensity to consume of \(0.5,\) and \(Y^{*},\) income- expenditure equilibrium GDP, equals \(\$ 500\) billion. Given an autonomous increase in planned investment of \(\$ 10\) billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase of planned investment spending of \(\$ 10\) billion raises real GDP and \(Y D\) by \(\$ 10\) billion, leading to an increase in consumer spending of \(\$ 5\) billion \((M P C \times\) change in disposable income) in row \(2,\) raising real GDP and \(Y D\) by a further \(\$ 5\) billion. a. What is the total change in real GDP after the 10 rounds? What is the value of the multiplier? What would you expect the total change in \(Y^{*}\) to be based on the multiplier formula? How do your answers to the first and third questions compare? b. Redo the table starting from round 2 , assuming the marginal propensity to consume is \(0.75 .\) What is the total change in real GDP after 10 rounds? What is the value of the multiplier? As the marginal propensity to consume increases, what happens to the value of the multiplier?

Although the United States is one of the richest nations in the world, it is also the world's largest debtor nation. We often hear that the problem is the nation's low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP?

In an economy with no government and no foreign sectors, autonomous consumer spending is \(\$ 250\) billion, planned investment spending is \(\$ 350\) billion, and the marginal propensity to consume is \(2 / 3\). a. Plot the aggregate consumption function and planned aggregate spending. b. What is unplanned inventory investment when real GDP equals \(\$ 600\) billion? c. What is \(Y^{*}\), income-expenditure equilibrium GDP? d. What is the value of the multiplier? e. If planned investment spending rises to \(\$ 450\) billion, what will be the new \(Y^{*}\) ?

How will planned investment spending change as the following events occur? a. The interest rate falls as a result of Federal Reserve policy. b. The U.S. Environmental Protection Agency decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. c. Baby boomers begin to retire in large numbers and reduce their savings, resulting in higher interest rates.
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