To understand the reasons for changes in the economy's output
To use the income-expenditure diagram
II. Data
Assumptions
Consumption: C = a + b(DI)
Investment (I), Government expenditure (G), Net Exports
(X-IM), and Taxes (T) are exogenous.
Steps
Enter the values of the parameters (a and b)
Enter the values of the exogenous variables (I, G, X-IM and T)
Solve for equilibrium values of GDP, DI, C and S.
Click on Gimme GDP! to confirm.
III. Questions
Assume particular values for the parameters of the consumption function:
a = ___________ b = ___________
Why should b lie between 0 and 1?
Based on your numbers: MPC = ___________ MPS = ___________. Explain.
Assume particular values for the exogenous variables:
I = _________ G = _________ X-IM = _________
T = _________
Compute the equilibrium values of the endogenous variables (show your calculations):
GDP = ___________
Disposable income = ___________
Consumption = ___________
Saving = ___________
Sketch the income-expenditure diagram.
Indicate the intercepts and slope of the C-line and AE-line.
Indicate the eqbm values of Y and C on the graph.
Suppose the marginal propensity to consume increases by 20%.
The new value of MPC is _________.
The new equilibrium values of the endogenous variables are:
GDP = ___________
Disposable income = ___________
Consumption = ___________
Saving = ___________
Is an increase in G expansionary? Explain. Provide a sketch.
Is an increase in taxes a contractionary fiscal policy? Explain. Provide a sketch.
Does an increase in foreign GDP lead to an increase in our GDP? Use changes in (X-IM) to explain. Provide a sketch.
The Paradox of Thrift describes a situation where increased saving by households results in lower GDP. In this model, the heightened desire to save is captured by a decrease in a in the consumption function. Do we observe the Paradox of Thrift in the model? Explain. Provide a sketch.