Assuming the level of investment is $16 billion and independent of the level of total output, complete the following table and determine the equilibrium level of output and income which the private sector of this closed economy would provide.
Possible Levels of Employment millions Real Output GDP=DI billions Consumption billions
40 $240 $244
45 260 260
50 280 276
55 300 292
60 320 308
65 340 324
70 360 340
75 380 356
80 400 372
a. What are the sizes of the MPC and the MPS?
b. Use the multiplier concept to explain the increase in equilibrium GDP which will occur as the result of an increase in planned investment spending from $16 to $20 billion.
c. If this economy has a labor force of 70 million at full employment, will there exist an inflationary gap or a recessionary gap if current equilibrium GDP 340? By how much and in what direction docs AE have to change to close this gap?
d. Will an inflationary or a recessionary gap exist if the economy has a labor force of 55 million at full employment? (Assume that current equilibrium GDP is 340) By how much and in what direction does AE have to change to close this gap?