Download 4 75.01 1 1 1 = − = − = mpc

Abdul Munasib
Econ 3313
Answers to end-of-the-chapter questions
Chapter 20 [page 536]: The IS-LM Model
1. Consumption function Table.
YD
0
400
800
1200
a
100
100
100
100
mpc × YD
0.9 × 0
0.9 × 400
0.9 × 800
0.9 × 1200
C = a + mpc × YD
100
460
820
1180
3. (a) Equilibrium output of 1,200 occurs at the intersection of the 450 line and the
aggregate demand function, Y ad = C + I = 300 + 0.75 * Y . (b) The equilibrium level of
output falls by 400 to 800.
1
1
5. The multiplier in Problem 4 =
=
= 5.
1 − mpc 1 − 0.8
The multiplier in Problem 3 =
1
1
=
=4.
1 − mpc
1 − 0 . 75
The intuitive explanation for the higher multiplier in Problem 4 is that the higher
marginal propensity to consume in that case results in a greater rise in consumer
expenditure when there is an increase in planned investment spending that raises
income. The greater rise in consumer expenditure then leads to a higher quantity of
output demanded (aggregate demand) and hence to a higher level of equilibrium
output.
7. True. In both situations, autonomous spending rises by $50 billion, leading to the
same increase in aggregate output.
∆G
9. ∆Y =
⇒ ∆G = ∆Y (1 − mpc) .
Since,
mpc = 0.5 ,
we
have,
1 − mpc
∆G = 1000 * (1 − 0.5) = 500 . So, government spending has to rise by $500 billion.
11. As a result of the reduction in taxes, consumer expenditure increases by
(mpc × ∆T = 0.5 × 300 =) $150 billion. Since government spending falls by $300
billion, the net change in autonomous spending is –$150 billion. So, aggregate output


1
falls by,  − 150 ×
= −150 × 2 =  $300 billion.
1 − mpc


13. If, as result of a fall in interest rates, planned investment spending doesn’t change,
equilibrium output remains unchanged, this means that the IS curve is vertical.
15. False. Even if the economy is at a point off both the IS and LM curves, it will have a
tendency to move toward both of them. Only when it is at the intersection of both
curves is there no tendency for the interest rate and output to change, so this is where
the economy comes to rest.