Answer:

The MPC, or marginal propensity to consume, is a value between 0 and 1 that describes an individual's consumption habits. For example, if Joe has an MPC of 0.7, that means he has a propensity to spend 70% of his income. If his income increases by $100, his consumption spending will increase by $70. This is the simple characteristic of the MPc.(a)GDP refers to the gross domestic product of a nation. It's a measure of all the expenditure in that nation within a given time. Typically referred to as Y , it is calculated via the formula below, where C is consumption, I is investment, G is government spending, X is exports, and M is imports.

In this example, investment plus government spending plus net exports equal $500 billion. Therefore, savings and net taxes must also sum to $500 billion. This is a fundamental property of the GDP calculation via the formula below, where S is saving and T is taxes.

(b)The spending multiplier is a value that describes the factor by which a change in spending changes GDP. It is calculated below where M is the multiplier.

Therefore, the spending multiplier is 5.

(c)The consumption function describes the change in an individual's consumption as his or her income changes. This value is also the slope of the consumption function. Therefore, it is by definition the MPC, or marginal propensity to consume. Along this, it is clear how the consumption function and spending multiplier are related. The multiplier calculation is included below.

With this in mind, it becomes clear that the multiplier and slope of the consumption function depend upon one another.

Answer:

Aggregate Income-Expenditure Model

Assuming there is no depreciation of capital stock or no fall in net inventories and no savings of firms, aggregate income-expenditure model states that each dollar of expenditure on final goods and services results in a dollar of income.In simple words, income-expenditure model states that when there is no depreciation of capital stock and no business saving, then an economy's aggregate expenditure results in aggregate income, which is equal to the real gross domestic product (Real GDP).

Determination of Real GDP demanded

Real GDP is determined at the intersection point between the aggregate expenditure line and the 45-degree line. The 45-degree line reflects the locus of points where aggregate income is equal to the real GDP.

In simple words, income-expenditure model states that at the given price level, real GDP demanded is determined where the aggregate expenditure and real GDP are equal.

Real GDP can be stated as the aggregate output or aggregate income. Real GDP is measured on horizontal axis and aggregate expenditure is measured on vertical axis.

Below the intersection point, desired spending is more than the real GDP and above the intersection point, real GDP is more than the desired spending.

Answer:

In this example, a lot of information is provided in billions of dollars. The consumption function is as follows, where C is consumption and Y is income. Investment, or I is equal to 50. G , or government spending, is 30. Net exports, X - M , is equal to -100.

To calculate the spending multiplier, the MPC must be located in the given information. Consumption functions typically take the form:

In this equation, b is the marginal propensity to consume and NT is net taxes. Thus, in the provided equation, the MPC is 0.75. The calculation of the spending multiplier is as follows:

To calculate real GDP, or Y , the standard equation C + I + G + X - M is used. It is as follows, in billions of dollars.

Government spending influences GDP much the same way that consumption spending does. Therefore, it is subject to the same multiplier that was calculated above. Initially G is $30 billion; now it is $40 billion.

Thus, an increase in government spending of $40 billion would result in an increase in Y of $40 billion.