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!)

3. a) C = 2000+0.7YD T = 50 I = 400 G = 500 Y = C+I+G =>Y = 2000+0.7 (Y – 50)+400+500 =>Y = 2000 + 0.7Y – 35 + 900 =>Y – 0.7Y = 2900 – 35 =>0.3 Y = 2865 => Y = 2865/0.3 = 9550 So, GDP = $9550. b). MPC = 0.7 We have to find multiplier Multiplier= 1/(1-MPC) = 1/(1-0.7) = 1/0.3 = 3.33 Hence, Multiplier = 3.33 C). There is fall in consumer spending. Fall in autonomous consumption = – 50 So, Total change in economy = change in C × multiplier = -50 × 3.33 = - 166.67 so that total change in economy will be -$ 166.67 d). Rise in investor confidence. Increase in autonomous investment = 100 Change in investment = 100 So, Total change in economy= ∆I × Multiplier = 100 × 3.33 = 333.33 Hence, The total change in economy = $333.33 e). Current GDP = $20 trillion Expected GDP = $22 trillion Change in GDP (∆GDP) = $22 trillion - $20 trillion = $2 trillion Multiplier = 3.33 Government spending = ∆ GDP / Multiplier = $2 trillion / 3.33 = $0.6 trillion. So, Government should increase its spending by $0.6 trillion.

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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 =