1. Suppose Marginal Propensity to consume equals 0.75. What would be the change
ID: 1112585 • Letter: 1
Question
1. Suppose Marginal Propensity to consume equals 0.75. What would be the change in the equilibrium level of output if the Government increases its spending from $400 b to $460 b? 2. Suppose Marginal Propensity to Save equals 0.2. What would be the change in the equilibrium level of output if the Government increases taxes by $70 b? Refertothe graphsdrav ninthefollowingfigureLand-answer a#3 below. AE (in billions of S) AE $700 $650 -- $600 t 45 $600 $700 Y= Real Output (in billions of s) 3. The full employment level of this economy is $700 billion, but it is in equilibrium at $600 billion, then i). What is the GDP gap? li). What is the Recessionary gap?Explanation / Answer
1. The multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4
Resultant change in Y = change in govt. Expenditure * multiplier
Resultant change in Y = $60 billion*4 = $240 billion
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