Economics 121 B & C

Quiz 8 Answers

Prof. A. D. Becker

In the U.S. economy, suppose that the aggregate consumption function is estimated to be:

C = 0.6 Y

and private investment, government purchases of goods and services, and net exports total $2,200 billion.

1. Determine Gross Domestic Product (GDP) for the income levels shown in the table.

National Income (Y)

GDP

5000

5200

6000

5800

GDP = C + I + G + NX

C = 0.6 Y and I + G + NX = 2200

If Y = 5000 then C = 0.6(5000) = 3000 and GDP = 3000 + 2200 = 5200

If Y = 6000 then C = 0.6(6000) = 3600 and GDP = 3600 + 2200 = 5800

2. What is the numerical value of the marginal propensity to consume (mpc)?

MPC = 0.6 (slope of the consumption function)

3. If private investment rises by $100 billion, by how much will equilibrium national income rise?

D Y = multiplier D I

D Y = 1/(1-MPC) D I

D Y = 1/(1 - 0.6) (100)

D Y = 2.5 (100)

D Y = 250

Disclaimer