## ECO403 Assignment 2 Fall 2020 – Assignments – Solution VU

**ECO403 Assignment 2 Fall 2020 solution idea:**

**Macroeconomic (ECO403) **

**Assignment No. 2**

**Student Name: **

**Student ID**:

**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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