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ES2560: Week 6 Consumption, Real GDP, and the Multiplier

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According to the basic consumption function, consumption rises at a fixed rate when both

disposable income and real GDP increase.

Tasks:

Consider the diagram below, which applies to a nation with no government spending, taxes,

and net exports. Use the information in the diagram to answer the questions, and explain your

answers.

What is the marginal propensity to consume?

What is the present level of planned investment spending for the present period?

What is the equilibrium level of real GDP for the present period?

What is the equilibrium level of saving for the present period?

If planned investment spending for the present period increases by $25 billion, what will

be the resulting change in equilibrium real GDP? What will be the new equilibrium level

of real GDP if other things, including price level, remain unchanged?

ES2560: Week 6 Consumption, Real GDP, and the Multiplier

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Submission Requirements:

Submit the analysis in approximately two to three pages for grading before the end of the

week.

Format: Microsoft Word

Font: Arial, 12-point, double-spaced

Evaluation Criteria:

Criteria Points Assigned Points Earned

Did you answer all parts of the question properly? 85

Did you use appropriate grammar and spelling, and cited

references, where applicable?

15