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.**Graph Explanation:**- **X-Axis (Horizontal):** Represents the Output in Trillions of dollars, ranging from 0 to 8.- **Y-Axis (Vertical):** Represents the Price Level, ranging from 100 to 140.- **Blue Line (AD₁):** Indicates the initial aggregate demand curve, sloping downward from a price level of 140 at output 0 to a price level of 100 at output 8.- **Green Line:** Instructions suggest plotting the new aggregate demand curve (AD₂) parallel to AD₁ using the green line with a triangle symbol. 1. The multiplier effect of a change in government purchasesConsider 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**, and the expenditure multiplier for this economy is ____.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 _____________. 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 multiplier effect asserts that as government expenditure increases to stimulate the economy,…

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 , and the expenditure multiplier for this economy is 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 . 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

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 , and the expenditure multiplier for this economy is 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 . 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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 1 There is a recession gap of $150 billion in the economy. The MPS is 20%. What is the MPC [Select] and the Government Spending Multiplier [Select] Government need to [Select] much [Select] change taxes, would they [Select] the Tax multiplier [Select] [Select] ? Would the spending? By how ? If the Government decided to taxes? What is and by how much
True or False? Explain: The multiplier effect is likely to be greatest when the government spending is targeted at the poorest The poor will always spend most of the money they get as benefits as soon as possible Multiplier effect does not depend on who receives the money The richest people will spend a larger proportion of their money than the poorest
There is a tax-cut that increases your Disposable Income by $3,400, which you intend to save $510. a. Calculate the MPC. b. Interpret this MPC. (What does it mean? Define MPC and describe in this context.)c. What is the resulting fiscal multiplier? d. Interpret the multiplier and describe the multiplier effect. e. Find the total change to the economy from this tax change.
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4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8, and the spending multiplier for this economy is 5. Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to -$2,000 billion. This decreases income yet again, leading to 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 (AD) 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…
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6 If the marginal propensity to consume (MPC) is 0.40, the expenditure multiplier will be equal to _______ . (Enter your answer using ONE decimal place)
1 et Question 3 There is an inflationary gap of $40 billion in the economy. The MPC is 75%. What is the MPS [Select] and the Government Spending Multiplier [Select] Government need to [Select] much [Select] change taxes, would they [Select] the Tax multiplier [Select] [Select] ? Would the spending? By how ? If the Government decided to taxes? What is and by how much
5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD. 1 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 þ f AD₂ AD 3 The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 billion. Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the…
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