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1. Explain briefly how spending can multiply, and then calculate the spending multiplier
when the MPC is
2. The economy is experiencing a contraction (recessionary gap) of $400 billion. What
government spending stimulus would you recommend to move the economy back to full
employment if the MPC is 0.75? Would your policy be any different if the MPC were
3. If the consumption function is C= $200 billion + 0.9Y,
a) How much do consumers spend with income of $3 trillion?
b) How much do they save?
4. Suppose that investment demand increases by $100. Assume that households have a
marginal propensity to consume of 80 percent. Compute the first three rounds of
multiplier effects as follows:
a) What are the first cycle changes in spending? Total cumulative change equals?
b) What are the second cycle changes in spending? Total cumulative change equals?
c) What are the third cycle changes in spending? Total cumulative change equals?
5. If Korean exports to the U.S. decline by $15 billion, by how much will total Korean
spending drop if their MPC is 0.60?
6. What are the key features of the consumption function? What causes
consumption to rise and fall? Does the level of consumption deserve
7. What is the MPC and APC all about? Can you compare and contrast these
concepts? Is it better to have a high propensity to consume or lower?
Which people fit the high versus low category?