ECON 1BB3 Lecture Notes - Lecture 8: Fiscal Multiplier, Aggregate Demand, Consumption Function

Consider an economy in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports:

Ca = 1,500 - 10r c = 0.6 Ip = 2,400 - 50r G = 2,000 T = 1,800 NX = -200

a. Compute the value of the marginal propensity to save.

b. Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5.

c. Compute the equilibrium level of income, given that the interest rate equals 5.

d. Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by $750 billion. Compute the decrease in autonomous consumption that results from the decline in household wealth.

e. Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5.

f. Using your answers to parts c-e, compute the value of the multiplier.

Question 1

Which of the following describes the relationship between the change in inventories and aggregate expenditure?

1 points

Question 2

Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?

1 points

Question 3

If aggregate expenditure at a particular level of income is less than output,

1 points

Question 4

The consumption function

1 points

Question 5

The focus of the short-run macro model is on the role of

1 points

Question 6

If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?

1 points

Question 7

If the marginal propensity to consume is 0.7, the expenditure multiplier is

1 points

Question 8

Aggregate expenditure is the sum of

1 points

Question 9

If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?

1 points

Question 10

When real consumption expenditure is plotted against real disposable income the resulting relationship is

Assuming “other liabilities” are zero, what is the size of the money and quasi-money stock? This is the caculation of monetary account. Basing on the data below.

Private consumption 500

Public consumption 100

Private investment 80

Public investment 20

Exports of goods and services 100

Imports of goods and service 150

Net factor services income -50

Net transfers 20

Government revenue 80

Government current expenditure 100

Government capital expenditure 20

Foreign direct investment 10

Net other capital from abroad 5

Stock of international reserves 550

Credit to private sector 150

Credit to Government 100