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Delineates income and consumption levels

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1. Assuming that the economy's MPC is 2/3 and that the government spending increases by $20 billion, what would be the impact on the equilibrium level of GDP?

2. If the economy's MPS is .2, what is the multiplier?

3. Given the following table that delineates income and consumption levels, calculate the MPC.

Income (Y)

Consumption (C)

$100 Billion

$160 Billion

200

240

300

320

400

400

500

480

600

560

Hint: Remember that MPC = ΔC/ΔY. Therefore, ask yourself the question of how much would you spend if your income changes from $100 to $200?

4. If the prevailing level of output (equilibrium) is $800 billion and the full-employment (potential) output of $600 billion, and we know that the economy's MPC is .8, how much should government spending be reduced to eliminate the inflationary gap? If taxes were increased instead, how much would the increase have to be?

Reference no: EM131045907

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