Part I ?Consumption = $3 trillion, Investment spending =$2 trillion, Government

Question

Part I

?Consumption = $3 trillion, Investment spending =$2 trillion, Government purchases = $2 trillion, net exports via the ROW is $0 trillion.

1.     What is the best estimate of real GDP?

Based on this equation, the real GDP

2.     If taxes net of transfer payments are $ 1 trillion, what is savings?

Part II?Assume the marginal propensity to consume = .8, and government purchases increase by $.2 Trillion.

1. Potentially, how much will real GDP increase in the short-run after the increase in government purchases?

2.  Besides government purchases, what and how much did another spending category increased due to the multiplier described above? Explain.??

Part III?Given the scenario in II above, answer the last two questions.

1.  What phase of the business cycle is the economy?

2. If inflation increased by 5% during the same period, what was the change in nominal GDP??     (This answer is tied to part II number 1 but not part I.)

Consumption = $3 trillion, Investment spending =$2 trillion, Government purchases = $2 trillion, net exports via the ROW is $0 trillion. What is the best estimate of real GDP? Based on this equation, the real GDP If taxes net of transfer payments are $ 1 trillion, what is savings? Assume the marginal propensity to consume = .8, and government purchases increase by $.2 Trillion. Potentially, how much will real GDP increase in the short-run after the increase in government purchases? Besides government purchases, what and how much did another spending category increased due to the multiplier described above? Explain.?? Given the scenario in II above, answer the last two questions. What phase of the business cycle is the economy? If inflation increased by 5% during the same period, what was the change in nominal GDP?? (This answer is tied to part II number 1 but not part I.)

Explanation / Answer

Assume the marginal propensity to consume = .8, and government purchases increase by $.2 Trillion.

1. Potentially, how much will real GDP increase in the short-run after the increase in government purchases?

According to Keynesian theory, in the Short Run GDP will increase 0.8 x $2trillion = $1.6 trillion.

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