Homework 3
Macroeconomics Fall 2015
Dr. Ben Tafoya
Please answer each question fully as some have multiple parts.
1. What is the multiplier effect? (10 points)
What relationship does the Marginal Propensity to Consume (MPC) bear to the size of the multiplier? (10 points)
What about the Marginal Propensity to Save and the size of the multiplier? (5 points)
2. What will the multiplier be when the MPS is .4 .6 and 1? (10 points)
What will it be when the MPC is 1 .67 and .50? (10 points)
How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is .80? (5 points)
3. See attached spreadsheet GDP Questions Data. The data in columns 1 and 2 in the accompanying table are for a private closed economy:
a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy. (15 points)
b. Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in columns 5 and 6 and determine the equilibrium GDP for the open economy. Explain why this equilibrium GDP differs from that of the closed economy. (10 points)
4. What effects would each of the following have on aggregate demand or aggregate supply? Consider each item in isolation and assume all other things remain constant. Each item is worth 5 points.
a. A widespread fear of depression on the part of consumers.
b. A $2 increase in the tax on a pack of cigarettes.
c. A reduction in interest rates at each price level.
d. A major increase in Federal spending for health care.
e. The expectation of rapid inflation.

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