Economics Homework 02

1. (MPC and MPS) If consumption increases by $12 billion when real disposable income increases by $15 billion, what is the value of the MPC? What is the relationship between the MPC and the MPS? If the MPC increases, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function?2. (Government Spending) How do changes in disposable income affect government purchases and the government purchase function? How do changes in net taxes affect the consumption function?3. (Net Exports) What factors are assumed constant along the net export function? What would be the impact on net exports of a change in real disposable income?4. Expectations and consumer confidence are important in determining fluctuations in aggregate spending. In your opinion, what is the present status of consumer confidence? Do you think consumers are pessimistic or optimistic? Briefly discuss.5. (Consumption Function) How would an increase in each of the following affect the consumption function? How would it affect the saving function?a. Autonomous net taxesb. The interest ratec. Consumer optimism or confidenced. The price level6. According to the life-cycle hypothesis, what is the typical pattern of saving for an individual over his or her lifetime? What impact does this behavior have on an individual’s lifetime consumption pattern? What impact does the behavior have on the saving rate in the overall economy?7. (Non-income Determinants of Investment) What are some factors assumed to be constant along the autonomous investment function? What kinds of changes in each factor could cause investment spending to increase at each level of real disposable income?8. What factors affect export and import? Briefly discuss.9. Why would the following investment expenditures increase as the interest rate declines?a. Purchases of a new plant and equipmentb. Construction of new housing

10. (Aggregate Expenditure) What are the components of aggregate expenditure? In the model developed in this chapter, which components vary with changes in the level of real GDP? What determines the slope of the aggregate expenditure line?

11. (Simple Spending Multiplier) For each of the following values for the MPC, determine the size of the simple spending multiplier and the total change in real GDP demanded following a $10 billion decrease in spending:

a.  MPC = 0.9

b.  MPC = 0.75

12. (Simple Spending Multiplier) Suppose that the MPC = 0.8 and that $14 trillion of real GDP is currently being demanded.  The government wants to increase real GDP demanded to $15 trillion at the given price level.  By how much would it have to increase government spending to achieve this goal?

13. Do you think the US has higher MPC such as 0.9 or lower MPC such as 0.6? Briefly discuss.