The total expenditure schedule in Macroland begins with these initial levels (in billions of dollars): Income = 1,000 . Consumption = 900; Investment = 200; Government = 300; Net Exports = ?100 . If the MPC = 0.75 and income increases in increments of

Question

200, find the equilibrium level of income. If full employment requires an income level of 2,000 . what (if anything) should the government do? Indicate both the direction of the spending change and the size of the spending change.

Answer 1

Initially, total expenditures equal 1,300 when income equals 1,000 . Therefore, equilibrium income will be higher (excess expenditures exist at the 1,000 income level). Each $200 increase in income results in a $150 increase in expenditures ($200 × the MPC of 0.75). At an income of $2,200, consumption is $1,800 and total expenditures are $2,200 . If full employment income is $2,000 . then an inflationary gap exists and expenditures must be cut. By trial and error it can be calculated that government spending must be cut from $300 by $50 to $250 . At the full employment level of income of $2,000 . Consumption will be $1,650, Investment = 200, Government = $250, and Net Exports = ?$100.