Question 1 (10 points)

THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ 1 / (1-MPC) ] * CHANGE IN G Initially, the economy is producing $13 trillion in goods and services and the government is spending $2 trillion. Then the government decides to increase its spending to $2.7 trillion.

a) What is the value of the spending multiplier? (3 POINTS)

b) Compute the new equilibrium level of output. (7 POINTS) Assume that the marginal propensity to consume is 0.7 (MPC=0.7).

Your answer:

Question 2 (10 points)

THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ 1 / (1-MPC) ] * CHANGE IN G Initially, the economy is producing $12 trillion in goods and services and the government is spending $1.5 trillion. Then the government decides to increase its spending to $2.4 trillion.

a) What is the value of the spending multiplier? (3 POINTS)

b) Compute the new equilibrium level of output. (7 POINTS) Assume that the marginal propensity to consume is 0.6 (MPC=0.6).