Question

Aggregate Output/Income	Net Taxes	Planned Investment	Aggregate Consumption	Government Spending
1,000	200	200	680	200
1,100	200	200	760	200
1,200	200	200	840	200
1,300	200	200	920	200
1,400	200	200	1,000	200
1,500	200	200	1080	200
1,600	200	200	1,160	200

Please show calculation

a. Complete the table by determining the aggregate expenditure, the unplanned inventory change, savings and disposable income at all income levels                          

b.               Determine the marginal propensity to consume (MPC) and marginal                

propensity to save.

c.                What is the equilibrium level of income?                                              

d.               Calculate the value of the multiplier                                                        

e.      Suppose the economy is at equilibrium and the government raises taxes from $100 million to $200 million, what will happen the equilibrium income?  

Answer 1

(a)

Aggregate output / Income	Net taxes	Planned Investment	Aggregate consumption	Government spending	Aggregate expenditure	Unplanned inventory change	Savings	Disposable income
1000	200	200	680	200	1080	-80	120	800
1100	200	200	760	200	1160	-60	140	900
1200	200	200	840	200	1240	-40	160	1000
1300	200	200	920	200	1320	-20	180	1100
1400	200	200	1000	200	1400	0	200	1200
1500	200	200	1080	200	1480	20	220	1300
1600	200	200	1160	200	1560	40	240	1400

Aggregate expenditure = Planned investment + Aggregate consumption + Government spending

Unplanned change in inventory = Aggregate output - Aggregate expenditure

Savings = Aggregate income - net taxes - aggregate consumption

Disposable income = Aggregate income - net taxes.

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(b) Each 100 increase in aggreagte income leads to increase in consumption by 80.

MPC = Change in consumption / Change in income

=> MPC = 80 / 100

=> MPC = 0.8

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MPC + MPS = 1

=> MPS = 1 - 0.8

=> MPS = 0.2

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(c) At equilibrium point, aggregate income = aggregate expenditure.

Thus, the equilibrium level of income is 1400

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(d) Multiplier = 1 / MPS
=> Multiplier = 1/0.2

=> Multiplier = 5

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(e) Tax multiplier = -MPC / MPS

=> Tax multiplier = -0.8 / 0.2

=> Tax multiplier = -4

Taxes increase from $100 to $200 million

=> Change in taxes = $100 million

Tax multiplier = Change in equilibrium income / Change in taxes

=> -4 = Change in equilibrium income / $100 million

=> Change in equilibrium income = -4 * $100 million

=> Change in equilibrium income = -$400 million

Hence, the equilibrium income will decrease by $400 million