MGEB06H3 Lecture 7: A Working Model (IS-LM) - Chapter 10 & 11

If the MPS is 0.25 and autonomous consumer spending increases by $75 billion, we would expect equilibrium income (Y) to: (show your work to the right)

A. increase by $75 billion.

B. increase by $300 billion.

C. decrease by $75 billion.

D. increase by roughly $100 billion.

E. None of the above

If the MPC is 0.80 and investment spending increases by $50 billion, we would expect equilibrium income (Y) to:

A. increase by $50 billion.

B. increase by $500 billion.

C. decrease by $50 billion.

D. increase by $250 billion.

E. None of the above

Suppose the government increases it’s spending by $100 billion as a stimulus package. If the MPC is 0.75, then equilibrium income will:

A. increase by $ 750 billion.

B. increase by $133.33 billion.

C. decrease by $600 billion.

D. increase by $400 billion.

If the MPC is 0.50 and government spending decreases by $150 billion, we would expect equilibrium income to:

A. decrease by $150 billion.

B. decrease by $300 billion.

C. increase by $75 billion.

D. decrease by $150 billion.

E. None of the above.

Part A. When government spending increases by $1, planned expenditures increases by $1
a) and the equilibrium level of income will increase by $1
b) and the equilibrium level of income will increase by $1 times the spending multiplier
c) and the equilibrium level of income will increase by less than $1

Part B. When taxes are cut by $1, planned expenditures
a)increase by less than $1, and the equilibrium level will increase by $1 times the tax multiplier
b) increase by $1, and the equilibrium level of income will increase by $1 times the tax multiplier
c) increase by $1, and the equilibrium level of income will increase by $1 times the spending multiplier