Economics -Q30

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Question 1. Consumption
 

The Keynesian cross for a representative household is given in the figure below.
 
The marginal propensity to consume is 0.9. Tax rate is 35%. There is no depreciation or indirect taxes.

     

  • How much does the household spend when it has no disposable income?

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  • How much does the household spend if its per capita GDP (the sum of wages and rent) is $55000? Does it break even (disposable income = C)?

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  • Suppose saving behavior is promoted among the population. What does the value of MPC have to become in order for a household to break even at the national income per capita of $55000?

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Question 2. Spending multiplier.
 
The elements of expenditure are as follows

Investment is I = 3500

Government spending is G = 5000

Net exports are NX = 0

Starvation-level consumption is s.l.c. = 4000

Furthermore,

Income tax rate is τ= 45%

GDP = 18000

The economy is in equilibrium.

  • Find the value of autonomous spending.

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  • Find the value of the spending multiplier.
 
     

  • What is the MPC in this country?

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Question 3. Equilibrium in the Keynesian Cross
 
The elements of expenditure are fixed:

Investment is I = 3500

Government spending is G = 5000

Net exports are NX = 0

Starvation-level consumption is s.l.c. = 4000

Furthermore,

The spending multiplier is 1.6

and the output is GDP = 22000

 

  • How do output and expenditure compare? What does that imply for the firms’ inventories? Are they increasing, decreasing, or remaining the same?

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  • Illustrate with the Keynesian Cross how the economy will converge to equilibrium in the fixed-price environment if no government intervention happens.

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  • Suppose the government decides to offset the business cycle by increasing the public spending, G. Find by how much G has to increase in order to set the equilibrium at output=expenditure=22000.

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Product Code -Economics -Q30
 
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