1. HOMEWORK PROBLEMS 9, 10, 12, 13 page 185

2. REAL DOMESTIC OUT PUT = DI AE, PRIVATE CLOSED ECONOMY EXPORTS IMPORTS
Chapter 9 #9 page 185
REAL DOMESTIC OUT PUT = DI
AE, PRIVATE CLOSED ECONOMY
EXPORTS
IMPORTS
NET EXPORTS
AE, PRIVATE OPEN ECONOMY
$200
$240
$20
$30
250
280 20 30
300
320
350
360
400
450
440
500
480
550
520
Chapter 9 #9 page 185

3. A. Graph the consumption schedule and determine the MPC.
Chapter 9 #10 page 185
GDP C
$100
$120
200
300
280
400
360
500
440
600
520
700
700
600
500
400
300
200
100 AE C
45◦ C
GDP = DI
A. Graph the consumption schedule and determine the MPC.

4. Consumption is reduced by the MPC of the tax
B. Assume that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Graph the resulting consumption schedule, and compare the MPC and the multiplier with those of the pretax consumption schedule.
Consumption is reduced by the MPC of the tax
Chapter 9 #10 page 185
Consumption after Tax
$112
$192
$272
$352
$432
$512
$592
GDP C
TAX
$100
$120
$10
200 10
300
280
400
360
500
440
600
520
700
Equilibrium GDP is reduced by $40. Consumption is reduced by $8 and the multiplier is 5. The new equilibrium GDP is $160.
Equilibrium GDP is reduced by $40. Consumption is reduced by $8 and the multiplier is 5. The new equilibrium GDP is $160.

5. ANSWER: GDP increases by the amount of the change in spending ($20).
Chapter 9 #12 page 185
REAL DOM
REAL DOM. OUTPUT =DI
AE, PRIVATE CLOSED ECONOMY
EXPORTS
IMPORTS
NET EXPORTS
GOV’T EXPEND.
TAXES
AE, OPEN ECONOMY
200
240
$20
$30
$-10
250
280 20 30
-10
290
300
320
330
350
360
370
400
410
450
440
430
500
480
490
550
520
530
What is the result if the government plans to tax and spend $20 at each level of GDP?
ANSWER: GDP increases by the amount of the change in spending ($20).
The increase in taxes reduces consumption by the MPC of the tax. (20 X MPC (.8) = 16). 16 x 5 (the multiplier) = 80. Equilibrium GDP is reduced by $80.
The net result in the increase in taxes and the equal increase in spending is and increase in Equilibrium GDP by the amount of the change in spending ($20).
The increase in government spending of $20 increases Equilibrium GDP by $100. $20 X 5 (the multiplier) = 100.
The net result in the increase in taxes and the equal increase in spending is and increase in Equilibrium GDP by the amount of the change in spending ($20).

6. What will be the consequence of this gap?
Chapter 9 #13 page 185
If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap?
POSSIBLE LEVELS OF EMPLOYMENT, MILLIONS
REAL DOMESTIC OUTPUT AE 90
$500
$520
100
550
560
110
600
120
650
640
130
700
680
RECESSIONARY
What will be the consequence of this gap?
Employment will be 20 million less than at full employment.
By how much would AE in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary AE gap? Explain
$20
What is the multiplier in this example? 5
Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $500 billion?
INFLATIONARY
Employment will be 20 million less than at full employment.
Explain the consequences.
DEMAND-PULL INFLATION (higher prices, no increase in output)
By how much would AE in column 3 have to change at each level of GDP to eliminate the gap?
$20
What is the multiplier? 5