To describe:The marginal propensity to consume, multiplier, equilibrium GDP if government purchases were reduced by $60 and the price level remain unchanged
Answer to Problem 1TY
The results showed that if 75% of the income is consumed, then its multiplier effect on income will be 4%.Since, the multiplier effect on consumption is 4, the reduction in government purchases by $60 will reduce the consumption expenditure by $240.
Explanation of Solution
In table (2), the GDP of an economy equals to consumption expenditure when both are at $1,720; hence the equilibrium level of GDP is $1,720
In figure (1) , GDP is measured on horizontal axis and consumption expenditure is measured on vertical axis
Graphical representation of equilibrium level of GDP
Figure 1 indicates that the consumption expenditure and GDP obtain equilibrium at E1 when both values are at $1,720 and intersects the 45 degree line.
The increase in personal consumption per increase in additional amount of disposable income is described by the marginal propensity to consume (MPC).
The marginal propensity to consume can be calculated using the following formula:
The following table presents the marginal propensity to consume using the formula in equation (1)
Table- 3
DI | C | ΔDI | Δ C | MPC |
960 | 720 | - | - | - |
1080 | 810 | 120 | 90 | 0.75 |
1200 | 900 | 120 | 90 | 0.75 |
1320 | 990 | 120 | 90 | 0.75 |
1440 | 1080 | 120 | 90 | 0.75 |
Fifth column of table 1 shows the marginal propensity to consume is $0.75.
The consumption multiplier can be calculated using the following formula:
Using equation (2) calculate the multiplier:
The results showed that if 75% of the income is consumed, then its multiplier effect on income will be 4%.
Since the multiplier effect on consumption is 4, the reduction in government purchases by $60 will reduce the consumption expenditure by $240.
Introduction:The balance yield of an economy is the degree of yield at which the aggregate sum of planned spending is simply equivalent to that of output, or GDP. That isequilibrium GDP = C + Ig. Consumption expenditures rise with GDP while arranged gross speculation expenditures are autonomous of the degree of GDP.
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