(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
For the final part, you're asked to explore the effects of changes in investment spending on equilibrium GDP. In the first part you are asked to calculate the value of multiplier.
(Description)
Recall the consumption function is C equals 100 billion dollars plus 0.75 times YD and the original equilibrium value of Y asterisk is 1600 billion dollars. Use the table below to answer each of the following: What is the value of the multiplier? Table shows, GDP, disposable income, YD, consumer spending, C, planned investment spending, I sub Planned, planned aggregate spending, AE sub Planned, and unplanned investment spending, I sub Unplanned. Table has 6 columns labeled GDP, YD, C, I sub Planned, AE sub Planned, I sub Unplanned. There are 9 rows of data in the table. Columns have the following entries: GDP - 0, 400, 800, 1200, 1600, 2000, 2400, 2800, and 3200. YD - 0, 400, 800, 1200, 1600, 2000, 2400, 2800, and 3200. C - 100, 400, 700, 1000, 1300, 1600, 1900, 2200, and 2500. I sub planned - all equal to 300. AE sub Planned - 400, 700, 1000, 1300, 1600, 1900, 2200, 2500, and 2800. I sub Unplanned - negative 400, negative 300, negative 200, negative 100, 0, 100, 200, 300, 400. All numbers are given in billions of dollars.
(Speaker)
To find the multiplier we need the consumption function, which is C equals 100 billion dollars, plus 0.75 times disposable income. The multiplier is found by dividing 1 by 1 minus the MPC. For this problem, the multiplier is 1 divided by 1 minus 0.75 or 4.
(Description)
Recall: C equals 100 billion dollars plus 0.75 times YD, where the MPC is 0.75. The multiplier is found by solving: fraction, 1 over 1 minus MPC, equals fraction, 1 over 1 minus 0.75, equals 1 over 0.25, equals 4.
(Speaker)
In this part you are asked to analyze the effects of planned investment falling to 200 billion dollars, which is a 100 billion dollar decrease. Using the multiplier of 4, a 100 billion dollar decrease in investment will cause the equilibrium level of GDP to fall by 4 times 100 billion dollars or 400 billion dollars. To find the new equilibrium we must subtract 400 billion dollars from the original equilibrium of 1600 billion dollars. Doing so yields a new equilibrium of 1200 billion dollars.
(Description)
If planned investment spending falls to 200 billion dollars, what will be the new Y asterisk? Recall the multiplier is 4 so a 100 billion dollar decrease in investment will change GDP by delta Y asterisk equal 4 times minus 100 billion dollars equal minus 400 billion dollars. So, Y asterisk equals 1600 billion dollars minus 400 billion dollars equals 1200 billion dollars.
(Speaker)
The final part asks you to examine the effect of an increase in autonomous consumption to 200 billion dollars, or a 100 billion dollar increase. A change in autonomous consumption will have the same relationship to equilibrium GDP as a change in planned investment. So using the multiplier of 4, a 100 billion dollar increase in autonomous consumption will cause GDP to increase by 4 times 100 billion dollars, or 400 billion dollars. The new equilibrium level of GDP is found by adding 400 billion dollars to the original equilibrium of 1600 billion dollars, which yields a value of 2000 billion dollars.
(Description)
If autonomous consumer spending rises to 200 billion dollars, what will be the new Y asterisk? Recall the multiplier is 4 so a 100 billion dollar increase in investment will change GDP by delta Y asterisk equal 4 times 100 billion dollars equal 400 billion dollars. So, Y asterisk equals 1600 billion dollars plus 400 billion dollars equals 2000 billion dollars.