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1. 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. 0.3, 0.7, 1, 1.43, 3.3333? ,0.3, 0.7, I, 1.43, 3.3333? The marginal propensity to consume (MPC) for this economy is and the expenditure multiplier for this economy is -590 bil /-51000 bil /-5500 bil /-5210 bil /-5105 bil Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases vill . This decreases income yet again, causing a . The total change in demand resulting from the initial change in government spending lead to a decrease in income, generating an initial change in consumption equal to second change in consumption equal to is -1000 bil /-500 bill /-105 bil / -147 bil /-90 bil -0.6 trillion /-0.7 tril /-2.1 tril /-I tril 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 AD, by selecting it on the graph. 140 AD, 135 AD2 130 125 120 115 110 105 100 1 3 4 5 7 OUTPUT (Trillions of dollars) PRICE LEVEL

1. 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. 0.3, 0.7, 1, 1.43, 3.3333? ,0.3, 0.7, I, 1.43, 3.3333? The marginal propensity to consume (MPC) for this economy is and the expenditure multiplier for this economy is -590 bil /-51000 bil /-5500 bil /-5210 bil /-5105 bil Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases vill . This decreases income yet again, causing a . The total change in demand resulting from the initial change in government spending lead to a decrease in income, generating an initial change in consumption equal to second change in consumption equal to is -1000 bil /-500 bill /-105 bil / -147 bil /-90 bil -0.6 trillion /-0.7 tril /-2.1 tril /-I tril 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 AD, by selecting it on the graph. 140 AD, 135 AD2 130 125 120 115 110 105 100 1 3 4 5 7 OUTPUT (Trillions of dollars) PRICE LEVEL

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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1. 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. 0.3. 0.7, I, 1.43, 3.3333? ,0.3,0.7, I, 1.43, 3.3333? The marginal propensity to consume (MPC) for this economy is and the expenditure multiplier for this economy is -$90 bil /-51000 bil /-5500 bil /-5210 bil /-5105 bil Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will . This decreases income yet again, causing a . The total change in demand resulting from the initial change in government spending lead to a decrease in income, generating an initial change in consumption equal to second change in consumption equal to is -1000 bil /-500 bill /-105 bil /-147 bil /-90 bil -0.6 trillion /-0.7 tril /-2.1 tril /-I tril 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 AD, by selecting it on the graph. 140 AD 135 AD2 130 125 120 115 110 105 100 2 3 4 5 6 8 OUTPUT (Trillions of dollars) PRICE LEVEL
Transcribed Image Text:1. 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. 0.3. 0.7, I, 1.43, 3.3333? ,0.3,0.7, I, 1.43, 3.3333? The marginal propensity to consume (MPC) for this economy is and the expenditure multiplier for this economy is -$90 bil /-51000 bil /-5500 bil /-5210 bil /-5105 bil Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will . This decreases income yet again, causing a . The total change in demand resulting from the initial change in government spending lead to a decrease in income, generating an initial change in consumption equal to second change in consumption equal to is -1000 bil /-500 bill /-105 bil /-147 bil /-90 bil -0.6 trillion /-0.7 tril /-2.1 tril /-I tril 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 AD, by selecting it on the graph. 140 AD 135 AD2 130 125 120 115 110 105 100 2 3 4 5 6 8 OUTPUT (Trillions of dollars) PRICE LEVEL
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