Question

Using the information given and the equation C = $200B + b(YD), please answer the following questions.

1. Calculate the value of Consumption (C) using the equation C = $200B + b(YD) (3 points)
2. What is the value of MPC? (2 points)
3. What is the value of MPS? (2 points)
4. What is the value of multiplier M? (2 points)
5. What happens to the value of multiplier M when MPC increases? (2 points)
6. What happens to the value of multiplier M when MPS increases? (2 points)
7. Suppose that investment demand increases by $100 billionin a closed and private economy. Using the multiplier M you calculated in the #4, what will be the final cumulative impact on spending? (4 points)
8. The action above (aggregate demand increase) will shift the AD curve to the right or left? (1 point)
9. From your given information, do you have a saving or dissaving? (1 point)
10. What is the amount of your saving or dissaving? (1 point)

use the following information to answer the 10 questions.

C = $200B + b(YD)

b = 0.9

YD = $800B

Answer 1

A) C = 200+0.9(800)

C = $920 B

B) MPC = 0.9

C) MPS = 1-MPC = 1-0.9 = 0.1

D) Multiplier = 1/MPS = 1/0.1 = 10

E) When MPC increases, then value of MPS will fall

Since M = 1/MPS, a fall in the value of MPS will lead to an increase in the value of multiplier M

F) As MPS increases, value of Multiplier M will reduce

G) Increase in I = $100 B

M = 10

Total change in spending = 100 x 10 = $1000 billion

H) AD will shift to the right as I increases

I) Y = 800

C = 920 (calculated above)

S = Y-C

Since Y < C, there will be dissaving

J) Dissaving = C-Y = 920-800 = $120 B