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OPTION 1: Consider our model of consumption and savings in t…
OPTION 1: Consider our model of consumption and savings in the macroeconomy:(a) (8 points) Draw the two interconnected graphs that show the relationship between (1) GDP and Consumption and (2) GDP and Savings. Be sure to include all relevant lines, and label your axes and curves.(b) (3 points) Suppose an economy has a GDP of $100 million and spends $80 million on Consumption. How much does this economy save? What are the economy’s average propensities to consume (APC) and save (APS)?(c) (4 points) Say GDP increases to $120 million, and the economy now spends $95 million on Consumption. What are the economy’s marginal propensities to consume (MPC) and save (MPS)?(d) (BONUS: Up to 2 points) Calculate the multiplier for this economy and explain how the multiplier is related to the MPC and MPS.OPTION 2: Consider our model of the productive possibilities for an economy:(a) (8 points) Draw a Production Possibilities Curve (PPC) showing an economy’s trade-off between producing capital and consumption goods. Then, show what happens when the economy experiences positive economic growth. Be sure to include all relevant lines, and label your axes and curves.(b) (3 points) PPCs are described as being “concave” in shape. What does this shape indicate about the marginal opportunity cost of increasing production of one type of good?(c) (4 points) Will an economy see more economic growth if it produces a larger proportion of consumption goods, or a larger proportion or capital goods? Explain your answer.(d) (BONUS: Up to 2 points) We discussed the impact of institutions, the “rules of the game,” on economic growth. Do historical institutions influence economies’ economic growth today? Explain your answer.
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