# Solow’s model of economic growth and MPC discussion

Solow’s model of economic growth and MPC discussion

The following questions must be answered thoroughly and correctly. Please do not bid for the assignment if you can’t confidently provide the correct answers.

Solow’s model of economic growth predicts that developed economies should grow more slowly than developing economies, so that living standards should be converging worldwide.

• What two factors provide the foundation for this prediction? (4 pts)
• To what extent has the real world proven this prediction correct? Discuss in light of the empirical evidence offered in the textbook (figure 9-9, panels A and B).

(answer on a separate sheet of paper) (6 pts)

2. What is the difference between the aggregate expenditures in the national income accounts and the planned aggregate expenditures in the Keynesian cross model? (2 pts)

3. What role does the 45-degree line play in the Keynesian Cross Model? (2 pts)

4. Use the graph below to answer question 4, parts a through e.

a. What are the values of the following quantities in the multiplier model depicted in the graph above? (the “b” stands for “billion”) (3 pts)

• Autonomous expenditures (planned)
• Marginal propensity to consume (mpc)
• Multiplier

b. What is the equation for the planned AE function shown above (with numbers for the slope and vertical intercept)? (2 pts)

c. What is the equilibrium level of GDP in this model? (I need a number for an answer.) Show it on the graph. (2 pts)

d. Suppose a crisis in investor confidence causes planned investment to fall by \$5 billion. What will be the new equilibrium level of output? (2 pts)

e. Taking as your starting point the original equilibrium that you found for part c, suppose the full employment level of output is \$550 billion. By how much should the government increase spending to move this economy to full employment? (2 pts)

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5. Suppose the mpc is ¾, and that the economy is stuck at a recessionary equilibrium with GDP of \$1 trillion (\$1000 billion), while the full employment level of GDP is \$1.4 trillion (\$1400 billion).

By how much should the government increase spending to move this economy to full employment? (4 pts)

6. Assuming the same values for the mpc, equilibrium GDP, and full employment GDP as in question 5: (3 pts)

• How large an increase in planned expenditures would move this economy to full employment?
• How would exports have to change to move this economy to full employment (increase or decrease, and by how much)?
• How would imports have to change to move this economy to full employment (increase or decrease, and by how much)?