Homework #3

ECON 202
J-term 2015 (5 points)

Name Matt Mickolichek

Due: Wednesday, January 14

Consider the following simple model of GDP and national income (Y):
C
I
YD
GDP
Y
a.

=
=
=
=
=

200 + .80YD
400
Y
C + I
GDP

Consumption Function
Investment Spending
Disposable Income
Gross Domestic Product
Equilibrium

Calculate the equilibrium level of national income (Y*).

Y = C + I = (200 + .80YD) + 400 = 600 + .80YD
YD = Y so Y = 600 + .80Y
Subtract .80Y and then .20Y = 600

Y = 600/.20

Y* = $3000

b.

If potential output (YP) is $2,800, is the economy currently above

or below this level? By how much?
Y* is above potential output by $200.

c.

What is the value of the MPC?

What is the value of the MPS?

MPC is the slope of the consumption function = .80. Since MPC plus
MPS must equal 1, MPS = .20
d.

What is the aggregate spending multiplier value in this model?

Multiplier = 1/(1-MPC)
1/(1-.80) = 5