MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 9.A, Problem 1TY
To determine
To calculate: The net exports at each level of
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Consider the non-linear aggregate consumption function:
C = 0.05Y²+ Y + 80
(Where, C = aggregate consumption and Y = aggregate income).
21
d) Find the elasticity of the consumption function and show that it equals the
MPC/APC.
Find the equilibrium level of GDP (income or V) demanded in an economy in which investment (1) is always $300, net exports (X-IM) are always - 550, government expenditures (G) and taxes (T) are each equal to $400, and the consumption function is described by the following algebraic equation:
C = 150 + 0.75Dl
DI is disposable income.
How much saving (5) is there at the equilibrium level of income.
Hint:
(1) Dl = Y (national income or GDP) minus taxes (Y-T)
(2) Income (Y) not consumed (C) must be saved (S). This means that S = Y-C.
(3) to answer this you have to set Y=AE or Y=C+1+G (X-IM), and solve for Y. Then you have to solve for S.
Suppose that the consumer’s consumption demand function is given by Cd = 0.8(Y−T)+10. Investment is Id = 20, government expenditure is G = 10, and tax is T = 10.
What is the equilibrium GDP (income)?
Suppose that government expenditure increases by 10 units while tax is unchanged. How will GDP change? What is the multiplier?
Suppose that government expenditure increases by 10 units while tax also increases by 10 units. How will GDP change? What is the multiplier?
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- Determine the change in the equilibrium level of consumption (find ΔC) following a decrease in government spending from 400 to 300 (ΔG = -$100). A: positive 400$ B: negative 300 c: negative 400 D: positive 300arrow_forwardConsider the non-linear aggregate consumption function: C = 0.05Y²+ Y + 80 (Where, C = aggregate consumption and Y = aggregate income). b) What is the relationship between MPC and APC in this case? c)What happens to the MPC as Y becomes larger and larger? Is it likely that an aggregate consumption function would have this functional form? e) Illustrate your solutions to (b) and (c) graphically, showing the consumption function, the MPC and APC.arrow_forwardSuppose that planned investment and planned government purchases do not depend on income: | = 15 and G = 17. Consumption, as you would expect, does depend on income via the consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12. Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best description of this situation? the (Y, AE) point is above the 45 degree line, Y will adjust down the (Y, AE) point is above the 45 degree line, Y will adjust up the (Y, AE) point is below the 45 degree line, Y will adjust down the (Y, AE) point is below the 45 degree line, Y will adjust uparrow_forward
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- The consumption function is given by: C = 200+0.75 (Y-T). The investment function is I = 200-25r. Government purchases and taxes are both 100. For this economy , graph the IS curve for r ranging from 0 to 8.arrow_forwardConstruct a consumption function from the data given here and determine the MPC. Given the consumption function in the above question, what is the relationship between disposable income and consumption?arrow_forwardThe following table shows consumption (C), investment spending (I), and government purchases (G), for some hypothetical economy at several levels of income (reported in billions of dollars of real GDP). Assume that in this economy, income is taxed at a rate of 25%, base consumption is $25 billion, and that the marginal propensity to consume (MPC) is 0.333, or 1/3. Further assume that this economy is closed, that is, there is no international trade and so net exports are always equal to zero. Use the given information to fill in disposable income, consumption, and planned expenditures in the following table. Income: Real GDP Disposable (After Tax) Income C Ip G Planned Expenditures (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) (Billions of dollars) 0 0 25 150 50 100 150 50 200 150 50 300 150 50 400 150 50 500 150 50…arrow_forward
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