Course: Economics

Topic 1: What do you conclude below?

Scenario 1: MPC = 0.6 and MPS = 0.4

1. Tax Multiplier = MPC/MPS

0.6 / 0.4 = 1.5

2. Aggregate Demand = Gov't. Taxes x Tax Multiplier

$2,300,000 x 1.5 = $3,450,000

Scenario 2: MPC = 0.5 and MPS = 0.5

1. Tax Multiplier = MPC/MPS

0.5 / 0.5 = 1

2. Aggregate Demand = Gov't. Taxes x Tax Multiplier

$2,300,000 x 1 = $2,300,000

Scenario 3: MPC = 0.2 and MPS = 0.8

1. Tax Multiplier = MPC/MPS

0.2 / 0.8 = 0.25

2. Aggregate Demand = Gov't. Taxes x Tax Multiplier

$2,300,000 x 0.25 = $575,000

Topic 2: What do you conclude below?

Scenario 1: MPC = 0.75 and MPS = 0.25

1. Government spending multiplier = 1 / MPS

= 1 / 0.25

= 4

1. Aggregate Demand = Govt. Spending x Govt Spending Multiplier

= $ 1,500,000 x 4

= 6,000,000

Scenario 2: MPC = 0.5 and MPS = 0.5

1. Government spending multiplier = 1 / MPS

= 1 / 0.5

= 2

1. Aggregate Demand = Govt. Spending x Govt Spending Multiplier

= $ 1,500,000 x 2

= 3,000,000

Scenario 3: MPC = 0.25 and MPS = 0.75

1. Government spending multiplier = 1 / MPS

= 1 / 0.75

= 1.33

1. Aggregate Demand = Govt. Spending x Govt Spending Multiplier

= $ 1,500,000 x 1.33

= 1,995,000

Topic 3: What does this number represent?

New Required Reserves => 10% x 21,350

=$ 2,135

New Excess Reserved = Liabilities - Required Reserves - Loans - Treasury Bonds

=23,750 - $2,135 - $8,000 - $6,500

=$7,115