Macroeconomics Principles
Problem Set 2.1 Answer Key
1. Chapter 11, Problem 2, Page 323 (assume T=0)
a. Complete the following table when autonomous consumption is $30 billion, the marginal
propensity to consume is 0.85, and net taxes are $0.
Autonomous
MPC x
Consumption=
Real GDP
Consumption
Disposable
MPC*(Y-T) + AC
(AC)
Income
0
30
0
30
100
30
85
115
200
30
170
200
300
30
255
285
400
30
340
370
500
30
425
455
600
30
510
540
b. Use your answers in part (a) and assume planned investment is $40 billion, government
spending is $20 billion, exports are $20 billion and imports are $35 billion. Complete the
table:
Real GDP Consumption Planned
Government
Net Exports Aggregate
Spending
Investment
Spending
Expenditures
0
30
40
20
=20-35=-15
75
100
115
40
20
-15
160
200
200
40
20
-15
245
300
285
40
20
-15
330
400
370
40
20
-15
415
500
455
40
20
-15
500
600
540
40
20
-15
585
c. Plot a 450 line and then use your data to draw an aggregate expenditure line.
See notes for graph.
d. What is the equilibrium level of real GDP? Illustrate it on your diagram.
Y=AE and AE line intersect at Y=500
e. What will happen if the actual level of real GDP in this economy is $200?
Inventory will decrease and output will increase as a result.
f.
What will happen if the planned investment in this economy falls to $25?
Change in GDP=1/(1-0.85) x (Change in I)=-100
GDP falls to Y*=400
2. Chapter 11, Problem 5, page 324
Use an aggregate expenditure diagram to show the effect of each of the following changes:
a. An increase in autonomous consumption due, say, to optimism on the part of consumers.
AE curve increases, equilibrium output increases.
b. An increase in US Exports.
AE curve increases, equilibrium output increases.
c. An increase in US imports.
AE curve decreases, equilibrium output decreases.
3. Chapter 11, Problem 1, Page 323 (assume T=0)
Y
C
IP
3000
2500
300
4000
3250
300
5000
4000
300
6000
4750
300
7000
5500
300
8000
6250
300
G
500
500
500
500
500
500
NX
200
200
200
200
200
200
a. What is the marginal propensity to consume implicit in these data?
mpc=slope AE curve=slope of cons. function=change in C/change in Y=750/1000=0.75
b. Plot a 450-line and then use the data to draw an aggregate expenditure line.
See notes.
c. What is the equilibrium level of real GDP? Illustrate it on your diagram.
Y*=5000
d. Suppose that investment spending increased by 250 at each level of income. What would
happen to equilibrium GDP?
change in GDP=1/(1-0.75) x (change in I)=4 x 250=1000
New equilibrium, Y**=6000
4. Chapter 11, Problem 3, Page 323 (assume T=0)
Y
C
IP
7000
6100
400
8000
6900
400
9000
7700
400
10000
8500
400
11000
9300
400
12000
10100
400
13000
10900
400
G
1000
1000
1000
1000
1000
1000
1000
NX
500
500
500
500
500
500
500
a. What is the marginal propensity to consume implicit in these data?
Slope of AE line=mpc=change in C/change in Y=800/1000=0.8
b. What is the numerical value of the expenditure multiplier for this economy?
Expenditure Multiplier=1/(1-mpc)=1/(1-0.8)=5
c. What is the equilibrium level of real GDP?
Y*=12000
d. Suppose that government purchases decreased from 1000 to 400 at each level of income.
What would happen to equilibrium GDP?
Change in GDP=1/(1-mpc) x (change in G)=5 x (-600)=-3000
New Y**=Y*-3000=9000