1.Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

2.Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes and no foreign trade, what will be the change in GDP if the following events occur?

3.Economists observed the only five residents of a very small economy and estimated each one’s consumer spending at various levels of current disposable income. The accompanying table shows each resident’s consumer spending at three income levels.

4.From 2008 to 2013, Eastlandia experienced large fluctuations in both aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income in millions of dollars for each of these years. Use this information to answer the following questions.

5.The Bureau of Economic Analysis reported that, in real terms, overall consumer spending increased by $18.2 billion during January 2013.

6.During the early 2000s, the Case–Shiller U.S. Home Price Index, a measure of average home prices, rose continuously until it peaked in March 2006. From March 2006 to May 2009, the index lost 32% of its value. Meanwhile, the stock market experienced similar ups and downs. From March 2003 to October 2007, the Standard and Poor’s 500 (S&P 500) stock index, a broad measure of stock market prices, almost doubled, from 800.73 to a high of 1,565.15. From that time until March 2009, the index fell by almost 60%, to a low of 676.53. How do you think the movements in home prices both influenced the growth in real GDP during the first half of the decade and added to the concern about maintaining consumer spending after the collapse in the housing market that began in 2006? To what extent did the movements in the stock market hurt or help consumer spending?

7.How will planned investment spending change as the following events occur?

8.Explain how each of the following actions will affect the level of planned investment spending and unplanned inventory investment. Assume the economy is initially in income–expenditure equilibrium.

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10.In an economy with no government and no foreign sectors, autonomous consumer spending is $250 billion, planned investment spending is $350 billion, and the marginal propensity to consume is 2/3.

11.An economy has a marginal propensity to consume of 0.5, and Y*, income–expenditure equilibrium GDP, equals $500 billion. Given an autonomous increase in planned investment of $10 billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase of planned investment spending of $10 billion raises real GDP and YD by $10 billion, leading to an increase in consumer spending of $5 billion (MPC × change in disposable income) in row 2, raising real GDP and YD by a further $5 billion.

12.Although the United States is one of the richest nations in the world, it is also the world’s largest debtor nation. We often hear that the problem is the nation’s low savings rate. Suppose policy makers attempt to rectify this by encouraging greater savings in the economy. What effect will their successful attempts have on real GDP?

13.The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers.