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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
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?
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