Discussion 1
The relationship between expenditures and income is the basis for the Keyensian model. On page 323, do problem 1 and on your own draw the graph. Then answer a and c.
Problem 1.
| Real GDP |
C |
IP
|
G
|
MX |
| 3,000 |
2,500 |
300
|
500
|
200 |
| 4,000 |
3,250 |
300
|
500
|
200 |
| 5,000 |
4,000 |
300
|
500
|
200 |
| 6,000 |
4,750 |
300
|
500
|
200 |
| 7,000 |
5,500 |
300
|
500
|
200 |
| 8,000 |
6,250 |
300
|
500
|
200 |
a. What is the marginal propensity to consume implicit in these data?
b. Plot a 45° line, and then use the data to draw an aggregate expenditure line.
c. What is the equilibrium level of real GDP? Illustrate it on your diagram.
d. Suppose that investment spending increased by 250 at each level of income. What would happen to equilibrium GDP?
Discussion 2
Discuss how the Multiplier leads to closing the gap between equilibrium and full employment.
Challenge question: Discuss why the tax multiplier is different. When would this multiplier be used?