Suppose that the real gdp of a country is in equilibrium at $480 billion. Now suppose that planned investment decreases by $4 billion, and that this decrease causes real GDP to shift to a new equilibrium level of $470 billion.

1. What is the spending multiplier for the country? What is the marginal propensity to save for the country?

2 The consumption schedule for a country with a private closed economy is shown on the graph below. The level of planned investment for the country is $billion.

a. Draw the aggregate expenditures schedule for this country and identify equilibrium GDP.

b. What is the equilibrium gdp for the country?

c. What is the marginal propensity to consume for the country?

 

Answer:

1.

The multiplier effect represents how an increase in spending brings about a larger change in the level of output (GDP)/national income.

Spending multiplier = Change in output / Change in spending

So, multiplier = 10 / 4 = 2.5

Therefore, spending multiplier = 2.5

Spending multiplier = 1/ MPS

So, 2.5 = 1/ MPS

Therefore, MPS = 1/ 2.5 = 0.4

Hence, the Marginal Propensity to Save (MPS) is 0.4

2.

The following figure represents the consumption schedule:

As shown in the figure above, the Y-axis represents the aggregate expenditure and the X-axis shows the real GDP.

The aggregate expenditure schedule is shown by the line AE. The intersection between the AE line and the 45-degree line shows the equilibrium point (E). At point (E), the GDP is known as the equilibrium GDP.

The slope of the Aggregate expenditure (AE) line, which is ?ΔY??/ΔC , represents the marginal propensity to consume.

PFA