1 calculate gdp loss if equilibrium level of gdp is 8000...

1. Calculate GDP loss if equilibrium level of GDP is $8,000, unemployment rate 8.8%, and the MPC is 0.80. Hint: (Use Okun's law to calculate GDP loss) a) How much money should the government spend to eliminate this GDP loss? b) Calculate the tax cut needed to eliminate this GDP loss. 2. Calculate MPC, MPS and the Multiplier if consumption expenditure increases by $4,000 as a result of increase in income from $40,000 to $46,000. 3. Assume that initially G is $300 and equilibrium real GDP is $5000. If the multiplier is 5, what would be the new equilibrium level of GDP if Government expenditures increase to $500.

Transcript

0:00 Hello everyone.

00:01 So this question has three parts and first part of the question has two subparts.

00:06 First question says that calculate gdp loss if equilibrium level of gdp is $8 ,000.

00:12 Unemployment rate is 8 .8 % and the mpc is 0 .80.

00:17 So part a says how much money should the government spend to eliminate this gdp loss? so firstly talking to about the first question that is according to oecd.

00:30 Law for every 1 % fall in unemployment in an economy the gdp that is gross domestic product will rise by 2 % so according to okun's law 6 % minus unemployment rate multiplied by 2 is equals to dash multiplied by gdp so 6 % minus 8 .8 % multiplied by 2 is equal to dash multiplied by 8 ,000.

01:20 So on solving this 2 .8 % multiplied by 2 is equals to dash multiplied by 8 ,000.

01:28 So 5 .6 % multiplied by 8 ,000 is equals to $448.

01:38 So gdp gap is equals to $448.

01:49 Now talking about first part of the question that says how much money should the government spend to eliminate this gdp loss.

01:58 So, mpc is equals to 0 .80 and spending multiplier will be equal to 1 divided by 1 minus mpc.

02:21 That will be 1 divided by 1 minus 0 .8.

02:26 So it will be 5.

02:29 So our multiplier is, so the government should increase spending by our multiplier is 5 so government should increase spending by minus 448 divided by 5 that is 89 .6 dollars coming to part b that says calculate the tax cut needed to eliminate this gdp loss so mpc is same given 0 .80 so tax multiplier is equals to mpc divided by 1 minus mpc...

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