4.1 PROBLEMS

Question 4.1

In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment spending is $250 billion, and the marginal propensity to consume is 0.5.

  1. Write the expression for planned aggregate expenditure as in Equation 11A-1.

  2. Solve for Y* algebraically.

  3. What is the value of the multiplier?

  4. How will Y* change if autonomous consumer spending falls to $450 billion?

Question 4.2

Complete the following table by calculating the value of the multiplier and identifying the change in Y* due to the change in autonomous expenditure. How does the value of the multiplier change with the marginal propensity to consume?