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Cal State La Economy Consumption Schedule Questions

Cal State La Economy Consumption Schedule Questions

Question Description

1. A hypothetical economy’s consumption schedule is given in the table below.

GDP=DI

C

6600

6680

6800

6840

7000

7000

7200

7160

7400

7320

7600

7480

7800

7640

8000

7800

Use the information to answer the following:

  1. If disposable income were $7400, how much would be saved?

  1. What is the “break-even” level of disposable income?

  1. What is this economy’s marginal propensity to consume?

  1. What is the average propensity to consume when disposable income is $7000? When disposable income is $8000?

2. Multiplier effect.

  1. Suppose a $100 increase in desired investment spending ultimately results in a $300 increase in real GDP. What is the size of the multiplier?

  1. If the MPS is .4, what is the multiplier?

  1. If the MPC is .75, what is the multiplier?

  1. Suppose investment spending initially increases by $50 billion in an economy whose MPC is 2/3. By how much will this ultimately change real GDP?

3. The consumption and investment schedules for a private closed economy are given in the following table:

GDP=DI

C

I

6600

6680

80

6800

6840

80

7000

7000

80

7200

7160

80

7400

7320

80

7600

7480

80

7800

7640

80

8000

7800

80

Use the values in the table to answer the following:

  1. What is the equilibrium level of GDP?

  1. What is the level of saving at the equilibrium level of GDP?

  1. Suppose actual GDP is $7600. How much unplanned inventory change will occur? What will likely happen to GDP as a result?

4. Suppose a private closed economy has an MPC of .8 and a current equilibrium GDP of $7400 billion.

  1. What is the multiplier in this economy?

  1. Now suppose the economy opens up trade with the rest of the world and experiences net exports of $20 billion. What impact will this have on equilibrium real GDP?

  1. Next suppose a government is introduced and plans to spend $100 billion. By how much will this change in spending ultimately cause GDP to change, and in what direction?

  1. In order to finance this expansion of government spending, suppose the government decides to levy a lump-sum tax of $100 billion. By how much will GDP change, and in what direction?

5. Suppose an economy can be represented by the following table, in which employment is in millions of workers and GDP and AE are expressed in billions of dollars:

Employment

Real GDP

Aggregate Expenditures

100

1200

1275

105

1300

1350

110

1400

1425

115

1500

1500

120

1600

1575

125

1700

1650

Use the table to answer the following:

  1. What is the equilibrium level of GDP?

  1. What kind of expenditure gap exists if full employment is 120 million workers? What is its size?

  1. Suppose government spending, taxes, and net exports are all independent of the level of real GDP. What is the multiplier in this economy?

  1. Suppose instead that the economy is producing at equilibrium GDP. If this GDP is $200 billion below the economy’s potential, what is the size of the recessionary expenditure gap?

Fiscal Policy

6. When governments run budget deficits, how do they make up the differences between tax

revenue and spending?

7.What are the two tools of fiscal policy?

8. A government starts off with a total debt of $3.5 billion. In year one, the government runs a

deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three,

the government runs a surplus of $200 million. What is the total debt of the government at

the end of year three?

9. Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy is producing more than potential GDP.

10. What is the difference between a budget deficit, a balanced budget, and a budget surplus?


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