Principles of Macroeconomics

Answer each of the following questions completely. Be sure to explain the rationale behind the choices you make. Questions with one-word answers such as "yes" or "no" will be awarded NO credit. The only answers that do not require an explanation are calculation problems. Calculation problems should be proven by showing the process you used or the formula you applied to solve the problem. An explanation is ALWAYS more than one sentence.

Explain Every Answer in Detail

Question 1: Keynesian Theory

Assume the United States has the following consumption information:

GDP = Income Consumption

$4000 $4500
$6000 $6000
$8000 $7500
$10000 $9000
$12000 $10500

Also the economy has G = $1100, I = $404, and XN = $15. Unemployment in the economy is currently 5.2% and inflation is 0.1%

a. What is the MPC in this economy?
b. What is the multiplier in this economy?
c. What is the equilibrium level of GDP in this economy?
d. What is the equilibrium level of Income in this economy?

Question 2: Keynesian Fiscal Policy

Assume the economy has a GDP of $11,500 billion. The unemployment rate is at 7.3% and has been slowly rising for the last 6 months. Inflation was at 2.3% one year ago but has since dropped to near 0%. The MPC in the economy is .75 and the Natural Rate of Unemployment is 5.0%.

a. What problem is the economy currently facing?
b. Is the problem serious enough that government should act to solve it?
c. If the government does decide to act, what size government expenditure would fix the problem
d. What size tax change would fix the problem?
e. Why would it be better for government to solve the problem using government purchases (part c above) rather than taxes (part d above) to solve the problem?
f. Assuming that government does decide to use the tax policy, what could happen to cause the policy to be ineffective?