These YouTube videos can guide the answers: https://youtube.com/playlist?list=PL3Q5kY-rwbc_u1v_fUgWLuIeRgprkm8q5
Question 1
Suppose that the Dwayne “The Rock” Johnson is shooting his new movie, “Fast and the Furious 15:
Milky Way Drift”. He needs to form a budget and is tracking his consumption and savings habits but is
not doing a very good job of it. He is able to fill in only portions of the table below.
Income (Y) Consumption
(C)
Savings (S) APC APS MPC MPS
4000 4000 N/A N/A
4150 50
4400 100
4450 0.97
4800 200 0.04
a) Fill out the table with the correct numbers. Carry out calculations to two (2) decimal places, and
remember to show all of your calculations. (For Row #4, round the income calculation to the
nearest $100.)
b) What happens to APC, APS, MPC, and MPS as income increases?
c) Suppose Dwayne’s income increases by $5,000. How much will his consumption and savings
change by?
Question 2
Ruth Langmore has recently been given an inheritance, and she decides to take this $125,000 of this
money to invest in her new business venture wither her brother, Wyatt Langmore. The marginal
propensity to consume is currently 0.60.
a) What is the spending multiplier?
b) What is the change in equilibrium/aggregate income?
c) What would happen to equilibrium/aggregate income if Ruth and Wyatt decided to consume or
spend the $125,000 instead of investing it?
d) According to the lecture videos, what variables will be affected by the spending multiplier?
Question 3
The Ice King reigns over the Ice Kingdom, and he wants to enact some economic policies within his
country.
a) Suppose the Ice King is considering increasing taxes by $200 to impact the economy. Would it
matter if the MPC were 0.25, 0.60, or 0.75? Show your calculations and reasoning.
b) What is expected to happen with equilibrium/aggregate income with this policy if the MPC were
0.75?
c) Suppose the Ice King decides to increase government spending by $200 instead. Would it matter
if the MPC were 0.25, 0.60, or 0.75? Show your calculations and reasoning.
d) What is expected to happen with equilibrium/aggregate income with this policy if the MPC were
0.75? Is this a greater or smaller impact than the answer you received in (b)? Why?
e) Suppose the Ice King enacts both an increase of taxes $200 and an increase of government
spending of $200 simultaneously. What is expected to happen with equilibrium/aggregate income
with these policies? Would it matter if the MPC were 0.25, 0.60, or 0.75? Why or why not?
Question 4
The Flame Princess rules over the Fire Kingdom and oversees her economy. She notices that the current
GDP for her kingdom is $6.95 trillion while the kingdom’s full-employment GDP is $9.28 trillion.
a) If the MPC is 0.50, what does the Flame Princess need to do in order to reach full-employment
GDP? Show your calculations.
b) Is this considered a recessionary or inflationary gap? Why?
Question 5
Princess Bubblegum is the ruler of the Candy Kingdom and oversees her economy. She notices that the
current GDP for her kingdom is $12.16 trillion while the kingdom’s full-employment GDP is $8.41
trillion.
a) If the MPC is 0.80, what does Princess Bubblegum need to do in order to reach full-employment
GDP? Show your calculations.
b) Is this considered a recessionary or inflationary gap? Why?
Sample Solution
