Multiplier Problem

Use these graphs to answer the questions that follow

Our overall goal is to learn HOW MUCH the government has to change spending or taxes to achieve full employment.

1. What is the MPC? ____.8______
   
2. What is the MPS? ____.2_________
   
3. What is the simple multiplier? ______5________
   
4. What is the current equilibrium level of output in this economy? ____400__________
   
5. What level of output can be achieved if this economy had full employment? ____500_________
   
6. What change in government spending is needed to achieve full employment?
   
   GDP = government spending x multiplier
   
   100 = ? x 5
   
   government spending needed to achieve full employment = + 20
   
7. What is the lump-sum tax multiplier? ___4___________
   
8. What change in taxes could the government enact to achieve full employment?
   
   GDP = lump sum taxes x lump sum tax multiplier
   
   100 = ? x 4
   
   lump sum taxes needed to achieve full employment = -25
   
   
9. In the questions above as real GDP increased there was no change in the price level as in graph (a) above. But as an economy approaches the full employment level of GDP usually the price level will begin to rise as the cost of resources rise as in graph (b) above. Assuming that there is an increase in the price level as the economy approaches full employment as in graph (b), What is the multiplier with changes in the price level?
   
   GDP = government spending x multiplier
   
   In question #6 above we saw that if government spending increased by $20 billion, then, assuming that there is noe inflation and MPS = .2, the AD curve would move from AD1 to AD2 and there would be a + $100 billion change in GDP. but if there is inflation, then when government spending increases by $20 billion and AD increases from AD1 to AD2, the new equilibrium is only 460, not 500.
   
   Therefore:
   
   GDP = government spending x multiplier
   
   60 = +20 x ?
   
   and the multiplier with changes in the price level is 3
   
   GDP = government spending x multiplier
   60 = 20 x 3
   
   
10. Now, with these changes in the price level, what change in government spending is needed to achieve full employment?
    
    GDP = government spending x multiplier
    
    100 = ? x 3
    
    Change in government spending needed to achieve full employment if there is inflation is + $33 1/3 billion.
    
    100 = 33 1/3 x 3