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Chapter 12: Q.17 (page 278)

Consider the current equilibrium real GDP level of \( 18.0 trillion displayed in Table 12-2. Based on your answer to Problem 4, if real government spending were to decrease by \)1.0 trillion, what would be the resulting change in real GDP? What would be the new equilibrium level of real GDP? Verify that at the new level of government spending, this new equilibrium real GDP equals C+I+G+NX.

Short Answer

Expert verified

The real GDP falls by$5trillion and a new equilibrium level of real GDP is $13trillion

Step by step solution

01

introduction

Gross domestic product (GDP) is the standard proportion of the worth added made through the production of labour and products in a country during a certain period.

02

explanation

Change in real GDP = ∆Y

Change in government spending = ∆G

we know,

ΔY=ΔG1−mpcmpc = 0.8

⇒ΔY=−11−0.8=-5

The real GDP falls by $5trillion and a new equilibrium level of real GDP is $13trillion.

The equilibrium at new GDP is GDP = C+I+G+NX.

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Most popular questions from this chapter

At various times in the past-the early 1980 s, early 1990 s, early 2000 s, and late 2000 s-business profit expectations plummeted, and firms cut back on their investment spending. The ratio of total investment spending to companies' aggregate profit flows decreased markedly. In each instance, real GDP declined, and the U.S. economy fell into recession. At the end of the recession intervals of the early 1980 s, early1990 s, and early 2000 s, business profit expectations improved. Firms responded by boosting their investment spending, and both real GDP and the ratio of investment expenditures to firms' profits recovered fully. At the conclusion of the late-2000s recession, however, this ratio failed to return to its previous level. By the time you have completed this chapter, you will understand why the result during this current decade has been a sluggish improvement in real GDP and, hence, an unusually slow economic recovery.

Evaluate why autonomous changes in total planned expenditures have a multiplier effect on equilibrium real GDP

In light of the above discussion, how is a greater degree of habit persistence in consumption likely to affect the marginal propensity to save? Explain your reasoning.

How could toughened federal regulations of businesses during the current decade have inhibited a rightward shift in the imvestment function?

Consider the table below when answering the following questions. For this economy, the marginal propensity to consume is constant at all levels of real GDP, and investment spending is autonomous. Equilibrium real GDPis equal to \(8,000. There is no government.


a. Complete the table. What is the marginal propensity to consume? What is the marginal propensity to save?

b. Draw a graph of the consumption function. Then add the investment function to obtain C+I.

c. Under the graph of C+I, draw another graph showing the saving and investment curves. Does theC+Icurve cross the45-degree reference line in the upper graph at the same level of real GDPwhere the saving and investment curves cross in the lower graph, at the equilibrium real GDPof \)8,000? (If not, redraw your graphs.)

d. What is the average propensity to save at equilibrium real GDP?

e. If autonomous consumption were to rise by $100, what would happen to equilibrium realGDP?

Calculate the multiplier for the following cases.

a.MPS=0.25

b. MPC=56

c. MPS=0.125

d. MPC=67
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