ECO221: Principles of Macroeconomics Class Exercise Aggregate Expenditures 1. What is the important difference between the average propensity to consume (APC) and the marginal propensity to consume (MPC)? 2. Why we wouldn't expect investment to grow sufficiently to pull the economy out of a depression. 3. What the multiplier effect and why does a multiplier exist? 4. Why does a $100 reduction in taxes not have the same impact on output and employment as a $100 increase in government spending. 5. How do injections and withdrawals into an economy affect its income and output? 6. Assume a simple Keynesian depression economy with a multiplier of 4 and an initial equilibrium income of $3,000. Saving and investment equal $400, and assume full employment income is $4,000. a. What is the MPC equal to? The MPS? b. How much would government spending have to rise to move the economy to full employment? C. Assume that the government plans to finance any spending by raising taxes to cover the increase in spending (it intends to run a balanced budget). How much will government spending and taxes have to rise to move the economy to full employment? d. From the initial equilibrium, if investment grows by $100, what will be the new equilibrium level of income and savings? 7. In modern politics, the word Keynesian often is synonymous with "big government" spending. Does this characterization accurately reflect the role of government in spurring economic activity? How would a tax cut be characterized today versus in Keynes's time