ECN 360 T6 Homework

12-2. Consider the table below when answering the
following questions. For this hypothetical economy,
the marginal propensity to save is constant at
all levels of real GDP, and investment spending
is autonomous. There is no government. (See
pages 253263.)
Real GDP
$ 2,000
4,000
6,000
8,000
10,000
12,000

Consumption
$2,200
4,000
______
______
______
______

Saving
$______
_____
_____
_____
_____
_____

Investment
$400
______
______
______
______
______

a. Complete the table. What is the marginal propensity to save? What is the marginal propensity to consume?

b. Draw a graph of the consumption function. Then add the investment function to obtain C + I.
c. Under the graph of C + I, draw another graph showing the saving and investment curves. Note
that the C + I curve crosses the 45-degree reference line in the upper graph at the same level
of real GDP where the saving and investment curves cross in the lower graph. (If not, redraw your graphs.) What is this level of real GDP?
d. What is the numerical value of the multiplier?
e. What is equilibrium real GDP without investment? What is the multiplier effect from the inclusion of investment?
f. What is the average propensity to consume at equilibrium real GDP?

12-4. Calculate the multiplier for the following cases.
(See page 267.)
a. MPS = 0.25
b. MPC = 5/6
c. MPS = 0.125
d. MPC = 6/7

12-6. The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 billion.
By how much will equilibrium real GDP increase at the current price level, other things being equal? (See page 267.)

12-12. Consider the diagram below, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram
to answer the following questions, and explain your answers. (See pages 253263.)