3. In the simplest version of the multiplier, the multiplier is calculated based
only on the marginal propensity to consume (written as mpc or c). In other
words, we assume all household income is either saved or spent on
consumption goods produced in the same economy.
a. Calculate the GDP: C = $2000+ 0.7YD T = $50 I = $400 G = $500
b. Suppose the mpc is 0.7. Assuming no trade or taxes in this simple case,
calculate the multiplier.
c. Imagine there is a fall in "consumer confidence" - maybe people believe
some world event is going to cause the economy to contract so they spend less.
This means a fall in autonomous consumption spending of -50. Using the
multiplier you just found in (a), calculate roughly how this fall in consumer
confidence will ripple out into the macroeconomy.
d. Imagine there is a rise in "investor confidence" - investors believe the
economy is ripe for expansion. This means a rise in autonomous investment of
100. Using the same multiplier, calculate roughly how this translates into a rise
in aggregate income.
e. Suppose that GDP is currently $20 trillion dollars and the government
believes it can grow to $22 trillion dollars. Given the same multiplier you
calculated in (a), how much would the government have to increase its
spending to raise GDP to this amount? (Hint: it does not have to increase its
spending by the difference in these two GDPs!)
