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2006“2007:
MPC 5 [C(2007) 2 C(2006)]/[Y(2007) 2 Y(2006)] Specific Super
Motors Duper Farmers Government Total
5 (2,160 2 1,920)/(2,700 2 2,400)
5 240/300 Wages 3.8 4.5 0.8 9.1
+ Interest 0.1 0.2 0.7 1.0
5 0.8
+ Rent 0.2 1.0 2.0 3.2
+ Profits 1.6 0.9 4.3 6.8
= Nat. Income 20.1
C
$ 2,160 + Ind. Bus.Tax 0.5 0.2 0.7
= NNP 20.8
+ Depreciation 0.6 0.2 0.8
$ 1,920
Consumer Spending




= GDP 21.6
$ 1,680


$ 1,440
Personal income 5 National income 1 Transfer
payments
5 20.1 1 1.2 5 21.3
$ 1,200
Disposable income 5 Personal income 2 Taxes
5 21.3 2 1.33 5 19.97
0
0


0


0


0


0
50


80


10


40


70




(since taxes are 10% of wages 1 interest 1 rent, which total 13.3)
1,


1,


2,


2,


2,
$


$


$


$


$




Note: Profits were computed as follows:
Disposable Income




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:

Appendix 397



3.
Specific Super
Motors Duper Farmers F I GU R E 2
Revenues 6.8 14.0 7.0
“ Wages “3.8 “4.5
D
110
“ Interest “0.1 “0.2 “0.7
“ Rent “0.2 “1.0 “2.0
105
“ Intermediate Goods “7.0




Price Level
“ Depreciation “0.6 “0.2
100
“ Ind. taxes “0.5 “0.2
= Profits “1.6 0.9 4.3
95

D
90


CHAPTER 9:




0


0


0


0


0
Demand-Side Equilibrium:




06


08


10


12


14
1,


1,


1,


1,


1,
Unemployment or Inflation? GDP
1.
At lower prices, the real value of money and other assets
that are denominated in money terms is higher. Since
wealth influences consumption, at lower prices consump-
tion is higher.
F I GU R E 1 5. Y 5 C 1 I 1 G 1 (X 2 IM)
C 5 300 1 0.75DI
C 5 300 1 0.75(Y 2 1,200)
4,000
C 5 300 1 0.75Y 2 900
C 5 2600 1 0.75Y
3,900
Y 5 2600 1 0.75Y 1 1,100 1 1,300 2 100
Y 5 0.75Y 1 1,700
Expenditure




3,800 0.25Y 5 1,700
Y 5 4 3 1,700 5 6,800
3,700 This algebraic model yields the same equilibrium GDP as
Table 3 and Figure 10 in the chapter.
Compared to the answer to Test Yourself Question 4, we
3,600
find $800 more in GDP from a $200 increase in I. Thus
this question demonstrates that the multiplier of 4 applies
to changes in I as well as to changes in C.
0 3,600 3,700 3,800 3,900 4,000
7.
GDP
F I GU R E 3
The original equilibrium GDP is at Y 5 3,800, where
spending equals output. This is shown by the intersec-
tion of the lower of the two expenditure lines in the
graph above with the 45° line. The MPC calculated from C1 + I + G + (X “ IM)
the data is 0.90, so the multiplier is 10. If investment
spending rises by $20 (to $260) the equilibrium GDP will
C0 + I + G + (X “ IM)
increase by $20 3 10 5 $200, which is represented by a
Spending




vertical shift (by $20) to the upper expenditure function
in the diagram.




45°
1,320 1,440
Income




Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Licensed to:
Appendix
398



(b) S 5 (Y 2 T ) 2 C
Before Shift After Shift
S 5 (4,500 2 500) 2 [2300 1 0.8(4,500)]
Income Consumption Expenditure Consumption Expenditure S 5 4,300 2 3,600 5 700, which is equal to invest-
ment, so S 5 I.
1,080 880 1,160 920 1,200
1,140 920 1,200 960 1,240 (c) Now X 2 IM 5 100, so the last four lines of 5(a)
above are replaced by
1,200 960 1,240 1,000 1,280
1,260 1,000 1,280 1,040 1,320 Y 5 2300 1 0.8Y 1 700 1 500 1 100
1,320 1,040 1,320 1,080 1,360 Y 5 0.8Y 1 1,000
1,380 1,080 1,360 1,120 1,400 0.2Y 5 1,000
1,440 1,120 1,400 1,160 1,440
Y 5 5 3 1,000 5 5,000
1,500 1,160 1,440 1,200 1,480
1,560 1,200 1,480 1,240 1,520 S 5 (Y 2 T) 2 C
S 5 (5,000 2 500) 2 [2300 1 0.8(5,000)]
S 5 4,800 2 4,000 5 800
The graph above indicates that equilibrium GDP rises
from 1,320 to 1,440, or by 120. The oversimplified multi- Now, S is not equal to I.
plier formula can be used in this case. The marginal
propensity to consume can be calculated between any
Answers to Appendix B Questions

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