The Case:

Economy of Indonesia is the largest in Southeast Asia. Besides, it is one of

emerging market economy of the world. Indonesia is the world fourth most

populous nation. Main exports and imports of the Indonesia are given

below;

Exports: crude palm oil, electrical appliances, oil and gas.

Imports: cotton, animal feed, iron and steel

Major issues of the economy of the Indonesia are poverty and

unemployment. Suppose, in Indonesia to solve these issues government

decided to increase government spending in construction sector. This

spending would increase consumption, production, investment and

employment rate in the economy of Indonesia.

Requirement # 1:

Suppose before this government spending marginal propensity to

consume (MPC) was 0.7, after this spending, it became 0.8.

1. Calculate Government purchases multiplier, when MPC = 0.7

2. Calculate Government purchases multiplier, when MPC = 0.8

(Marking scheme: 2 + 2)

Requirement # 2:

Calculate Tax multiplier, when MPC = 0.8

(Marking scheme: 2)

Requirement # 3:

Suppose Consumption function of the economy of Indonesia is;

Consumption = C = 750 + 0.7 (Y - T)

Here 0.7 is MPC

Y = income

T= Taxes

Calculate consumption when income (Y) is equal to Rs. 1700 while Taxes

(T) Rs. 100