Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. This increases income yet again, causing a second change in consumption equal to ▼. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate-demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate-demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate-demand curve (AD2) is parallel to the initial aggregate-demand curve (AD1). You can see the slope of AD₁ by selecting it on the graph. 140 135 130 125 AD₁ AD₂ ?

Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. This increases income yet again, causing a second change in consumption equal to ▼. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate-demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate-demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate-demand curve (AD2) is parallel to the initial aggregate-demand curve (AD1). You can see the slope of AD₁ by selecting it on the graph. 140 135 130 125 AD₁ AD₂ ?

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.4P

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The following graph shows the aggregate demand curve ( AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve ( AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve ( AD1 ). You can see the slope of AD1 by selecting it on the graph. 140 AD, 135 AD, 130 125 120 115 110 105 100 3 4 OUTPUT (Trillions of dollars) PRICE LEVEL
4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.70 of each additional dollar they earn and save the remaining $0.30. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out."…
1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 v , and the expenditure multiplier for this economy is v Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to v. This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
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4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?