We again assume a simple closed economy with GDP of 100 and: c0 (autonomous consumption) = 20 c1 (marginal propensity to consume) = 0.6 I (investment) = 20. a) Now assume that c0 falls by 5 (i.e. 5% of GDP), i.e. for any given level of output, consumption will fall by 5. Show the implied fall in the AD function in your diagram and show that output will fall by more than 5. b) Show that the multiplier is equal to 2.5, and hence that, in the new equilibrium, output will have fallen by 12.5 (i.e. by 12.5%) c) How big would the impact be if, say, c1 = 0.4 or c1 = 0.8? Explain the difference.

We again assume a simple closed economy with GDP of 100 and: c0 (autonomous consumption) = 20 c1 (marginal propensity to consume) = 0.6 I (investment) = 20. a) Now assume that c0 falls by 5 (i.e. 5% of GDP), i.e. for any given level of output, consumption will fall by 5. Show the implied fall in the AD function in your diagram and show that output will fall by more than 5. b) Show that the multiplier is equal to 2.5, and hence that, in the new equilibrium, output will have fallen by 12.5 (i.e. by 12.5%) c) How big would the impact be if, say, c1 = 0.4 or c1 = 0.8? Explain the difference.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter9: Aggregate Expenditures

Section: Chapter Questions

Problem 7E

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