EXERCISES

CHAPTER 7 – NATIONAL INCOME DETERMINATION

EXERCISE 1

1. Idle resources
2. Straight line
3. Consumption function plus the amount of investment
4. 1
5. MPC
6. Average consumption
7. Consumption function
8. S/savings
9. Multiplier coefficient
10. APS
11. Savings
12. Net domestic savings
13. Investment
14. Net investments
15. Innovation
16. Inventories
17. Investment function
18. Price level
19. Interest rate
20. Net foreign lending

B.

1.
The diagram is a production possibility frontier; the points along the curve are the efficient
points (meaning, all resources are being utilized in the production of good x and y). Points
inside the curve are inefficient points since not all resources are being utilized. Lastly, points
outside the PPF are infeasible; meaning, the economy cannot produce those production
levels of good x and y, given the current level of resources. So, point A is a feasible
production but not efficient, while point B is an efficient level of production. Lastly, point C
is an infeasible level of production.
 2.

C.
Consider the formula C = mpc (Y) (under the assumption that autonomous spending is equal to
zero)
For example:
C=0.8 ( 100 )
C=80
Since Y = C + S:
Then S = 100 - 80, then S = 20
And do it for all.

Y C S
100 80 20
200 160 40
300 240 60
400 320 80
500 400 100

D.

1. for AE = C C=a+ cY
C=150+0.6 Y
Since AE = C and AE = Y, then:
Y =150+ 0.6 Y
Y −0.6 Y =150
0.4 Y =150
150
Y=
0.4
Y =375
Breakeven point is 375.

To compute for Equilibrium Consumption:

C=150+0.6 (250)
C=375 B
Breakeven point is 375.

2. for AE=C+I (the author specifies the investment is in billions, it should also be specified that
the autonomous consumption is also in billion)

C=a+cY
C=150+0.6 Y
Since AE = C + I and I = 50, then:
AE=150+0.6 Y +50
We want AE = Y, then:
Y =150+ 0.6 Y +50
Y =200+0.6 Y
0.4 Y =200
200
Y=
0.4
Y =500
Equilibrium income is 500.

To compute for Equilibrium Consumption:

C=150+0.6 (500)
C=450
Equilibrium consumption is 450.

3. for AE = C + I + G (the author specifies the government spending is in billions, it should also
be specified that the autonomous consumption is also in billion)

C=a+ cYd
Where Yd is disposable income (Yd=Y-T):
C=150+0.6 Yd
Since AE = C + I + G and I = 50 and G = 30, then:
AE=150+0.6 (Y −30)+50+30
We assume that tax is equal to 30 since the government uses taxes to generate revenue and
use it for government projects (spending).
We want AE = Y, then:
Y =150+ 0.6(Y −30)+50+30
Y =212+ 0.6 Y
0.4 Y =212
212
Y=
0.4
Y =530
Equilibrium income is 530.

To compute for Equilibrium Consumption:

C=150+0.6 (530−30)
C=450
Equilibrium consumption is 450.

4.
C/S 450

400

350

300

250
Consumption
Savings
200
Series3
150

100

50

0
100 200 300 400 500

EXERCISE 2

1. Q
2. R
3. P
4. J
5. H
6. O
7. K
8. N
9. E
10. D
11. I
12. C
13. A
14. L
15. F

EXERCISE 3
MPC MULTIPLIER INCOME GENERATED
50% 2 10 B
60% 2.50 12.5B
75% 4 20B
80% 5 25B
90% 10 50B

EXERCISE 4

1. C
2. I
3. C
4. I
5. C
6. I
7. I
8. C
9. I
10. C

EXERCISE 5

EXERCISE 6

(The answer of the students here may vary.)