Chapter 1. Chapter03

Step 4

Question

Recall the consumption function is C = $100 billion + 0.75 x YD and the original equilibrium value of Y* is $1,600 billion. Use the table below to answer each of the following

GDP YD C IPlanned AEPlanned IUnplanned
(billions of dollars)
$0 $0 $100 $300 $400 -$400
400 400 400 300 700 -300
800 800 700 300 1000 -200
1,200 1,200 1,000 300 1300 -100
1,600 1,600 1,300 300 1600 0
2,000 2,000 1,600 300 1900 100
2,400 2,400 1,900 300 2200 200
2,800 2,800 2,200 300 2500 300
3,200 3,200 2,500 300 2800 400
Table

What is the value of the multiplier?

The multiplier is h4XZagboIgc=.

3
Recall the multiplier equals 1/(1 − MPC); the value of the multiplier is 4 = 1/(1 − 0.75). For further review see section, “The Income-Expenditure Multiplier.”

Question

If planned investment spending falls to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $WYWjVQzT4dmH8TewByKWKg== billion.

3
Sorry, planned investment spending will decrease by $100 billion to $200 billion, the new Y* will equal $1,200 billion. If planned investment spending equals $200 billion, it has fallen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in planned investment spending, or decrease by $400 billion. For further review see section, “The Income-Expenditure Multiplier.”

Question

If autonomous consumer spending rises to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $W9ZYWUD5NT8aLa3R8qnWDQ== billion.

3
If autonomous consumer spending rises to $200 billion from $100 billion, the new Y* will equal $2,000 billion. If autonomous consumer spending equals $200 billion, it has risen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in autonomous consumer spending, or increase by $400 billion.For further review see section, “The Income-Expenditure Multiplier.”
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Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Question

The accompanying table gives the annual U.S. demand and supply schedules for pickup trucks.

Price of truck Quantity of trucks demanded (millions) Quantity of trucks supplied (millions)
$20,000 20 14
25,000 18 15
30,000 16 16
35,000 14 17
40,000 12 18
Table
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Step 3

Question

Suppose that the U. S. Department of Transportation imposes costly regulations on manufacturers that cause them to reduce supply by one- third at any given price. Calculate the new supply schedule by filling in the blanks in this table (quantities should include one decimal place, i.e. 15.0). Based on your findings, identify the new equilibrium price and the new equilibrium quantity.

Price of truck Quantity of trucks demanded (millions) Quantity of trucks supplied (millions) Quantity of trucks supplied after regulations (millions)
$20,000 20 14 7dANGMEJsXo=
25,000 18 15 bKegslKoKI4=
30,000 16 16 9KDiV20+kT0=
35,000 14 17 9TWoJfKY+mU=
40,000 12 18 DqNOfUdMWDI=
Table

The new equilibrium price is $pRvIdK+xdgr76NRm9PIdCBD/E5FDR/5IWae101RDFiY= (no decimals).

The new equilibrium quantity is DDH6Tw1RFEk= million (no decimals).

To find the correct answers you will multiply quantity supplied by two-thirds for all the prices listed. So at a price of $20,000 the manufactures will supply a quantity of 14*2/3 or 9.3 million trucks. At a price of $25,000 the manufacturers will supply a quantity of 15*2/3 or 10.0 million trucks, and so on. The new equilibrium price and quantity will be found where quantity demand equals the new quantity supplied. This occurs at a price of $40,000 and a quantity of 12 million trucks. For further review see section “What Happens When the Supply Cure Shifts”
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Step 4

Question

LeIpASjEOFjc69NDWwPwaWLpoN81cLb2NW4hCCPkHWblFYs6z7BDrFC7tX7G1bT7vCMdwUGif3dKgaCA6zOGNQcjuML0jNsSVeOTwCrFISeqrSk0k6/g1sWQB7dU/fTiraHGyq6DolzofoomdeU7bue7wrdhkJJO7SXB2uZvSwCpV7fgr0B0yXoJEeBPT/Wib/CiuWIqRhsk9OlvG0AqLOfO/hXX0TPyrgw346wQRp37s44/xbWa+fWVRt1UmN8qG5T1rSjuiUvdUTLCLDSGYtWG0TGhlCqDTmVbtmgW0tDH5ZOULL+BklXjbgNbvfBW88/W5mRj4WM=
In your response you should note that as the island of Atlantis faces increasing opportunity costs. Starting with zero potatoes (point F) and increasing production by 200 pounds leads to a decrease in the production of fish from 675 to 650 pounds(point E). The slope of the PPF from point F to point E is found by taking the change in fish production divided by the change in potato production which is -25/200 or -1/8. Furthermore, increasing the production of potatoes to 400 pounds leads to a decrease in fish production from 650 pounds to 600 pounds (point D). You will notice that with every 200 pounds of potatoes produced;the island must give up increasingly more pounds of fish. The slope from point E to point D is -50/200 or -1/4. Finally increasing potato production from 800 to 1000 pounds, moving from point B to point A,has an opportunity cost of 300 pounds of fish. The slope for this segment is -300/200 or -3/2. You will notice the production possibilities frontier gets steeper, the slope gets larger in absolute value, as the island produces more pounds of potatoes and fewer pounds of fish. The changing opportunity cost implies that as Atlantis produces more potatoes, the higher the opportunity cost. For instance, the island grows more and more potatoes, they will have to use less and less suitable land to do so. As a result, you have to divert increasingly more resources away from fishing as you grow more potatoes, meaning that you can produce less fish. This implies, ofcourse, that the production possibility frontier becomes steeper the further you move along it to the right, with the result that , the production possibility frontier has a bowed–out shape.
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Step 2

Question

This market demand curve qAFwn8k+j1NgAHF+zAQZxS4br10LlNJ2ZPMJvQdtZzHvcXiI00jnTRIphBXEufzRSIvZ/r1e/tQoJRbApEtbyA==, because the total quantity demanded C0zqD4tXs+kur+QpNgGhpPR9l2JqlpBCEXmLKD4NMspzwwiY0iAORkgeigw= as the price decreases.

As the price decreases from $3.25 to $2.00, the total quantity demanded increases from 15 to 39. This would result in a downward-sloping market demand curve (an inverse relationship between price and quantity).
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Step 4

Question

Recall the consumption function is C = $100 billion + 0.75 x YD and the original equilibrium value of Y* is $1,600 billion. Use the table below to answer each of the following

GDP YD C IPlanned AEPlanned IUnplanned
(billions of dollars)
$0 $0 $100 $300 $400 -$400
400 400 400 300 700 -300
800 800 700 300 1000 -200
1,200 1,200 1,000 300 1300 -100
1,600 1,600 1,300 300 1600 0
2,000 2,000 1,600 300 1900 100
2,400 2,400 1,900 300 2200 200
2,800 2,800 2,200 300 2500 300
3,200 3,200 2,500 300 2800 400
Table

What is the value of the multiplier?

The multiplier is h4XZagboIgc=.

3
Recall the multiplier equals 1/(1 − MPC); the value of the multiplier is 4 = 1/(1 − 0.75). For further review see section, “The Income-Expenditure Multiplier.”

Question

If planned investment spending falls to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $WYWjVQzT4dmH8TewByKWKg== billion.

3
Sorry, planned investment spending will decrease by $100 billion to $200 billion, the new Y* will equal $1,200 billion. If planned investment spending equals $200 billion, it has fallen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in planned investment spending, or decrease by $400 billion. For further review see section, “The Income-Expenditure Multiplier.”

Question

If autonomous consumer spending rises to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $W9ZYWUD5NT8aLa3R8qnWDQ== billion.

3
If autonomous consumer spending rises to $200 billion from $100 billion, the new Y* will equal $2,000 billion. If autonomous consumer spending equals $200 billion, it has risen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in autonomous consumer spending, or increase by $400 billion.For further review see section, “The Income-Expenditure Multiplier.”
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