ASSIGNMENT- 3.

04

ECONOMICS

Name:

Submitted to:
 Question-1

Names Income Consumption Savings

Carl 1 40,000 40,000
Carl 2 44,000 43,000 1000
Wanda 1 40,000 39,000 1000
Wanda 2 44,000 42,000 2000

I- Carl lives in the Macro Islands. What is Carl’s MPC?

MPC= ΔConsumption /ΔIncome

MPC= (43,000-40,000) / (44,000-40,000)

MPC= 3,000/4,000MPC

MPC = 0.75

The Carl's MPC is 0.75

II- Wanda lives in the Micro Islands. What is Wanda’s MPS?

Applying the formula:

MPS= ΔSavings /ΔDisposable Income

MPS= (2,000-1,000) / (44,000-40,000)

MPS= 1,000/4,000MPS

MPC = 0.25

Question-2

MPC in Macro Islands

Change in Y = [ 1/(1 – MPC )] x Change in Investment

$300 = 1 / (1-MPC) x $30

$300/30 = 1/ (1-MPC)

10 = 1 / (1-MPC)

(1-MPC) x 10 = 1

1-MPC = 1/10

1-MPC= 0.1

1-0.1= MPC

MPC = 0.9 ( In Macro Islands)

Question- 3

Values

MPC = 0.75

MPS = 0.25

The Multiplier of tax = - (MPC/MPS)

= - (0.75/0.25)

=3

The multiplier of Expenditures = 1/ (1-MPC)

= 1/( 1-0.75)

=1/ (0.25)

GDP is reduced as there is an increase in tax =300 x 3

=$900

GDP will increase when governemnet will spend more =300x4

=$1200
Increase in the total income will be=1200-900 Amount of total income =$300.

Question- 4

Marginal Propensity

ΔGDP = Multiplier x Δ(spending or taxes)

Multiplier of tax = –MPC / MPS or (ΔGDP) / (ΔTaxes)

Multiplier of expenditure = 1/(1-MPC), 1/MPS, or (ΔGDP)/(ΔSpending) In Terms of Billions of

Dollars:

ΔGDP = 1/(1-MPC) x Δ(spending) $400

=1/(1-MPC) x $80 5

= 1/(1-MPC) 1 - MPC

= 0.2 1 - 0.2 = MPC

MPC = 0.8