Module 8; Chapter 10 Econ Homework

Savings

S= DI - C savings= disposable income - consumptions

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

(250/50)= 5.0

rate of return

(current value - original value)/ original value) *100

Multiplier

1/(1 - MPC) or 1/ MPS

Suppose that disposable income, consumption, and saving in some country are $400 billion, $350 billion, and $50 billion, respectively. Next, assume that disposable income increases by $40 billion, consumption rises by $32 billion, and saving goes up by $8 billion. a. What is the economy's MPC? what is the MPS b. APC before? c. APC after?

a. (32/40) = .8 (8/40)= .20 b. (350/400)= .875 = .88 c. Disposable income after the change equals $440 (= $400 + $40). Consumption after the change equals $382 (= $350 + $32). APC= $382 / $440 = 0.868181818.

Suppose a handbill publisher can buy a new duplicating machine for $500 and the duplicator has a 1-year life. The machine is expected to contribute $545 to the year's net revenue. a. What is the expected rate of return? b. If the real interest rate at which funds can be borrowed to purchase the machine is 8.00 percent, will the publisher choose to invest in the machine? c. Will it invest in the machine if the real interest rate is 10.00 percent? d. If it is 11.00 percent?

a. (545-500) /500) *100 = 9 b. yes c. no d. no

Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $8 billion in the second round of the process. a. what is the mpc in this economy? b. what is the size of the multiplier c. If, instead, GDP and consumption both rose by $9 billion in the second round, what would have been the size of the multiplier?

a. (8/10)= /.8 b. 1 / (1- 0.8)= 5 c. (9/10) = .9 (that is the mpc needed for part c) 1/ (1- 0.9)=10

MPC

change in consumption /change in income

MPS

change in savings /change in income

APC

consumption / income

APS

saving / income

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

yes