Assignment

1. In the great recession of 2008-09, US output fell about$ 0.9 trillion below full employment output.

a. The government spending multiplier has been estimated to be 2. What change in government spending would restore full employment?
b. If the simple multiplier is 2, how large is the implied MPC?
c. In fact, the MPC is probably closer to 0.8 even though the multiplier is 2 (not 5). How can we explain this?

2. The economy's aggregate consumption function is given by C = 1000 + .75Y, where Y is income. What is the MPC? Find consumption spending when Y = 10,000 and when Y = 20,000. What is the APC at Y = 10,000 and at Y = 20,000? How does the APC change as income changes?

3. Suppose you are given the following consumption and income data: Consumption 100 190 280 370 460 550

Income 0 100 200 300 400 500 Obtain an equation for the consumption function. Use your function to predict the value of consumption when income is 1000.

4. Using the consumption function you derived in question 3, suppose planned investment is 20. Find equi- librium output.

5. Suppose C = 1000 + .7Y and I = 500. Find equilibrium income and output. Explain what would happen if production were 10,000.

In 1929, real GDP in the US was $976 billion (in 2005 dollars). By 1933, real GDP had fallen to $716b. Over the same period, real investment spending declined by $83b. Ignoring all other possible exogenous spending changes, estimate the size of the investment multiplier and then use this to estimate the MPC.

6. Given the following information, find the economy's IS curve and graph it.

C = 150 + .75(Y - T) I = 200 - 40r G = T = 200

Given the following information, find the economy's LM curve and graph it.

Ms = 130 and Md = 100 + .1Y - 10r