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ECO403 Macroeconomics Assignment No 02 Fall 2020 Solution / Discussion

ECO403 Assignment 2 Fall 2020 solution idea:

Macroeconomic (ECO403)

Assignment No. 2

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Requirement No.1

Suppose before this government spending marginal propensity to

consume (MPC) was 0.7, after this spending, it became 0.8.

i) Calculate Government purchases multiplier, when MPC = 0.7

ii) Calculate Government purchases multiplier, when MPC = 0.8

Answer:

(i)

When MPC is 0.7

ΔY / ΔG = 1/ 1 - MPC

ΔY = ( 1 / 1 - MPC )  ΔG

ΔY =  1 / 1 - 0.7

ΔY =  1 / 0.3

ΔY = 3.33

ΔY = ΔG (3.3)

(ii)

When MPC is 0.8

ΔY / ΔG = 1 / 1 - MPC

ΔY = ( 1 / 1 - MPC) ΔG

ΔY = 1 / 1 - 0.8

ΔY = 1 / 0.2

ΔY = 5

ΔY = ΔG (5)

Requirement No. 2

Calculate Tax multiplier, when MPC = 0.8

Answer:

ΔY / ΔT = - MPC / 1 - MPC

ΔY / ΔT =  - 0.8 / 1 - 0.8

ΔY / ΔT =  - 0.8 / 0.2

ΔY / ΔT = - 4

Requirement No. 3

Suppose Consumption function of the economy of Indonesia is;

Consumption = C = 750 + 0.7 (Y – T)

Here 0.7 is MPC

Y = income

T= Taxes

Calculate consumption when income (Y) is equal to Rs. 1700 while Taxes

(T) Rs. 100

Answer:

C = C ( Y - T)

C = 750 + 0.7 ( 1700 - 100)

C =  1870

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