DEMAND SIDE EQUILIBRIUM ACTIVITY
Problem 1. From the following data, find the marginal propensity to consume, compute the expenditure at each level of GDP, and find the equilibrium GDP:
GDP C I G X IM
5,000 3,650 1,000 1,200 700 1,100
5,500 4,000 1,000 1,200 700 1,100
6,000 4,350 1,000 1,200 700 1,100
6,500 4,700 1,000 1,200 700 1,100
7,000 5,050 1,000 1,200 700 1,100
7,500 5,400 1,000 1,200 700 1,100
Problem 2. In an economy with no government sector, investment is 1,000, net exports are 100 and the consumption function is:
Income Consumption
3,000 2,100
3,500 2,500
4,000 2,900
4,500 3,300
5,000 3,700
5,500 4,100
a) Calculate the expenditure schedule, and find the equilibrium level of GDP.
b) What are savings at this equilibrium GDP?
c) What is the marginal propensity to consume?
d) What is the multiplier?
e) People lower their savings and raise their consumption by 200 at each level of GDP. Use the multiplier to find the new equilibrium GDP.
f) Confirm your answer to e) by calculating the new expenditure schedule.
g) What is the level of savings at the new equilibrium GDP?
h) Compare and explain your answers to b) and g).