Micro Economics

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to the economy’s output. Lastly, productivity is important in finding out the big differences in living standards across countries, we have to focus on the production of goods and services.

Question 3

A. In closed economy, the private sector does not engage in international trade. Thus, the equilibrium level of output and income only occurs when saving =investment or Y (GDP) =consumption+ investment. From the table, we know the equilibrium level of investment is 16 billion, the saving is 16 billion, possible levels of employment is 65 million, Real domestic output is $340 billion and consumption is $324 billion that can provide the equilibrium level of output and income.

There will be a recessionary gap if this economy has a labour force of 70 million. The possible levels of employment are 5 million below its optimum point which is 65 million. Therefore, problem of not enough job opportunities is occurs in the market. Furthermore, the question has assumed that investment is equal to 16 million. Equilibrium GDP occurs when the saving equals investment. Investment is 16 billion, equilibrium GDP is 340 = consumption 324 billion + investment 16 billion. From this case, when labour force equals 70 million, that real GDP 360 billion is more than actual equilibrium GDP 340 billion; the suppliers will decrease the products prices to fill their excess production capacity.

B. MPC (marginal propensity to consume) = change in consumption / change in income. From this case, change in consumption is 16 billion, change in income is 20 billion, so MPC is 16/20=0.8. MPS (marginal propensity to save) = change in savings / change in income. From this case, change in saving is 4 billion, change in income is 20 billion, so MPS is 4/20=0.2. MPC plus MPS always equal 1.