PROBLEMS

  1. Question 11.1

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

MPC

Value of multiplier

Change in spending

Change in Y *

0.5

?

         ΔC = + $50 million

?

0.6

?

         ΔI = − $10 million

?

0.75

?

         ΔC = − $25 million

?

0.8

?

         ΔI = + $20 million

?

0.9

?

         ΔC = − $2.5 million

?

WORK IT OUT

For interactive, step-by-step help solving the following problem, check out this Work It Out tutorial under student resources.

Question 11.2

2. 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 spending 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?