Question1

Item 1

Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer.

The table below provides data on the spending on final goods, in billions of dollars, by consumers, businesses, and the government in equilibrium in a country with no international trade.

Aggregate Variables

Value (in billions of dollars) in the base year

Consumption spending

$900

Investment spending

$400

Government spending

$200

Transfer payments

$60

The marginal propensity to save is equal to0.4

0.4and there are no exports or imports.

(a) Calculate the realGDP

GDPin this country.Show your work.

(b) Calculate the marginal propensity to consume.Show your work.

(c) Suppose that the government increases spending from$200

$200billion to$300

$300billion.

(i) Calculate the maximum change in realGDP

GDP.Show your work.

(ii) Given the change in realGDP

GDPin part (c)(i), calculate the maximum level of the new equilibrium realGDP

GDP.Show your work.

(d) Suppose that taxes decrease by$100

$100billion. Will the maximum change in realGDP

GDPbe larger than, smaller than, or equal to the change in realGDP

GDPidentified in part (c)(i) ? Explain.