Eco 200-810   Spring 2001
Practice Worksheet: Aggregate Expenditure and the Multiplier
  1. Consider the following model:

    2.  

     
     
     

    C = 350 + .75Y
    G = 170
    I = 140
    X-IM = -10

    At what level of Y is there no saving? (hint: saving is zero when C=Y)
     
     
     
     
     
     

    Solve for equilibrium AE.
     
     
     
     
     
     
     
     
     
     

    What happens to equilibrium expenditure if I falls to 100?
     
     
     
     
     
     

    What happens to equilibrium expenditure if G rises to 200?
     
     
     
     
     
     

    Suppose we wish to increase equilibrium AE to 3000 (from the original equilibrium AE) How much do we need to increase G?
     
     
     
     
     
     

  2. Consider the following model:

    3. C = 1000 + .8(Y-T)
    G = 2100
    I = 1600
    T = 2000
    X-IM = 0

    Solve for equilibrium AE. (Hint: do not forget to put taxes (T) is the consumption function!)
     
     
     
     
     
     
     
     

    Suppose Congress and the President want to balance the budget. What happens to equilibrium if

    (a) We balance the budget by increasing taxes so that T=G?
     
     
     
     
     
     
     
     
     
     

    (b) We balance the budget by decreasing government purchases so that G=T?
     
     
     
     
     
     
     
     
     
     
     
     

  3. Suppose that when income increases by $1000, we expect consumers to increase their spending by $900. Given that, what is the impact of a $200 tax cut on equilibrium AE? (hint: what does the first sentence imply about the MPC?)

    4.  

     
     
     
     
     
     
     
     
     
     
     
     
     
     

  4. Given that C = 1000 + 0.60Y, if the level of income is $1000, what is the the level of saving? (hint: Y=C+S)

    5.  

     
     
     
     
     
     
     
     
     
     
     
     
     
     

  5. Given a consumption function of C=25 + 0.75Y, at what level of incomes does C=100?

    6.  

     
     
     
     
     
     
     
     
     
     
     
     
     
     

  6. Given that autonomous consumption equals $1000, disposable income equals $20,000, and the MPC equals 0.90, what are the levels of consumption and saving?