Answered: The following table shows consumption…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

Problem 4TY

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The following table shows consumption (C), investment spending (I), and government purchases (G), for some hypothetical economy at several levels of income (reported in billions of dollars of real GDP). Assume that in this economy, income is taxed at a rate of 25%, base consumption is $50 billion, and that the marginal propensity to consume (MPC) is 0.667, or 2/3.

Further assume that this economy is closed, that is, there is no international trade and so net exports are always equal to zero.

Use the given information to fill in disposable income, consumption, and planned expenditures in the following table.

Income: Real GDP	Disposable (After Tax) Income	C	Ip	G	Planned Expenditures
(Billions of dollars)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)	(Billions of dollars)
0	0	50	100	50
100			100	50
200			100	50
300			100	50
400			100	50
500			100	50

The following graph shows income (real GDP) on the horizontal axis and planned expenditure on the vertical axis.

Use the black line (plus symbol) to plot a 45-degree line on this graph. Then use all 6 of the the blue points (circle symbols) to plot the planned expenditure line for this economy. Be sure to plot these points at the income levels listed in the table (0, 100, 200, 300, 400, and 500 billion dollars).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

On the previous graph, use the black point (plus symbol) to indicate the equilibrium income.

Note: Dashed drop lines will automatically extend to both axes.

Suppose income is currently $500 billion. This would mean that , which would send a signal to firms to .

PLANNED EXPENDITURES (Billions of dollars
500
400
300
200
100
0
0
100
200
300
400
INCOME (Billions of dollars)
500
600
Note: Dashed drop lines will automatically extend to both axes.
45-Degree Line
Suppose income is currently $500 billion. This would mean that
would send a signal to firms to
PE Line
+
On the previous graph, use the black point (plus symbol) to indicate the equilibrium income.
Equilibrium Income
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I
which
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Use the black line (plus symbol) to plot a 45-degree line on this graph. Then use all 6 of the the blue points (circle symbols) to plot the planned
expenditure line for this economy. Be sure to plot these points at the income levels listed in the table (0, 100, 200, 300, 400, and 500 billion dollars).
Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.
PLANNED EXPENDITURES (Billions of dollars)
600
500
400
300
200
100
0
0
100
200
300
400
INCOME (Billions of dollars)
500
600
45-Degree Line
PE Line
+
Equilibrium Income
On the previous graph, use the black point (plus symbol) to indicate the equilibrium income.
?

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