Part I: The Dreaded Multiplier
The table below shows GDP, Disposable Income (YD), consumer spending (C) and planned investment spending (Iplanned) in Broncoland. Assume there is no government spending or foreign sector in this economy. All numbers are in billions of dollars. Complete the table below and answer the following questions.
|
GDP
|
YD
|
C
|
Iplanned
|
AE Planned
|
Iunplanned
|
|
$0
|
$0
|
$100
|
$300
|
|
|
|
400
|
400
|
400
|
$300
|
|
|
|
800
|
800
|
700
|
$300
|
|
|
|
1,200
|
1,200
|
1,000
|
$300
|
|
|
|
1,600
|
1,600
|
1,300
|
$300
|
|
|
|
2,000
|
2,000
|
1,600
|
$300
|
|
|
|
2,400
|
2,400
|
1,900
|
$300
|
|
|
|
2,800
|
2,800
|
2,200
|
$300
|
|
|
|
3,200
|
3,200
|
2,500
|
$300
|
|
|
a. Write the equation for the consumption function.
b. Write the equation for the AE Plannedfunction. Graph the AE Planned function. Add the 45 degree reference line to your graph (the line along which AE planned = GDP) Hint: try to graph to scale.
c. What is the equilibrium level of income? Explain why this income level is equilibrium.
d. What is value of the multiplier? Explain the multiplier. (This multiplier is called the autonomous expenditures multiplier or the fiscal policy multiplier. You will learn other multipliers later this semester.)
Part II. Autonomous Consumption Increases to $200 billion, the dreaded multiplier continued
a. Consumers are finally reassured the economy really is improving. Autonomous consumption increases $200 billion.
|
GDP
|
YD
|
C
|
Iplanned
|
AE Planned
|
Iunplanned
|
|
$0
|
$0
|
|
$300
|
|
|
|
400
|
400
|
|
$300
|
|
|
|
800
|
800
|
|
$300
|
|
|
|
1,200
|
1,200
|
|
$300
|
|
|
|
1,600
|
1,600
|
|
$300
|
|
|
|
2,000
|
2,000
|
|
$300
|
|
|
|
2,400
|
2,400
|
|
$300
|
|
|
|
2,800
|
2,800
|
|
$300
|
|
|
|
3,200
|
3,200
|
|
$300
|
|
|
b. Write the equation for the new consumption function.
c. Write the equation for the new AE Planned function.
d. Graph the original and the new AE Planned functions along with the 45 degree reference line.
e. What is the value of the new equilibrium level of income?
f. Did the new equilibrium level of income increase by $200 billion, the value of the increase in consumer spending? If not, explain why not.
Part III. Planned Investment spending falls $100 billion.
a. Business firms are worried about the state of the economy. The continuing strength of the U.S. dollar and lack of sustainable increases in consumer spending cause business firms to spend $100 billion less. Fill in the table below.
|
GDP
|
YD
|
C
|
Iplanned
|
AE Planned
|
Iunplanned
|
|
$0
|
$0
|
$100
|
|
|
|
|
400
|
400
|
400
|
|
|
|
|
800
|
800
|
700
|
|
|
|
|
1,200
|
1,200
|
1,000
|
|
|
|
|
1,600
|
1,600
|
1,300
|
|
|
|
|
2,000
|
2,000
|
1,600
|
|
|
|
|
2,400
|
2,400
|
1,900
|
|
|
|
|
2,800
|
2,800
|
2,200
|
|
|
|
|
3,200
|
3,200
|
2,500
|
|
|
|
b. Write the equation for the new AE Planned function.
c. Graph the original (Part I) and new AE Planned functions along with the 45 degree reference line.
d. What is the value of the new equilibrium level of income?
e. Did the new equilibrium level of income fall by $100 billion, the value of the decrease in autonomous investment? If not, explain why not.