Question

MPC=0.6

This is a closed economy. Wages are unable to adjust in the short run. At first, the economy equilibrium is at Y=Original, and P=Pe (the expected price level when managers signed contracts for nominal wages. This is a horizontal short-run aggregate supply curve.

Consider this: The government increased spending (G) by 215.

A) How will Investment (I) change in the short-run?

B) How will Consumption (C) change in the short-run?

C) How will Output (Y) change in the short-run?

D)How will Y change in the long-run?

E) How Will C change in the long-run?

F) How will I change in the long-run?

Answer #1

spending multiplier is 1/(1-mpc) = 1/(1-0.6) = 2.5. government spending is increased by 215 which means GDP will increase by 215*2.5 = 537.50.

A) there will be no change in investment because there is an increase in government expenditure which will increase GDP and its related variables

B) consumption will increase by 0.6*537.50 = 322.50

C) output will increase by 537.50

D) in the long run wages and prices will be flexible which means output will not be changed

E) there will be no change in consumption because there is no change in income

F) there is no change in investment

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