3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier for this economy is Suppose investment in this economy increases by $150 billion. The increase in investment will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income.

3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier for this economy is Suppose investment in this economy increases by $150 billion. The increase in investment will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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3. The spending multiplier effect
Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier
for this economy is
Suppose investment in this economy increases by $150 billion. The increase in investment will lead to an increase in income, generating an increase in
consumption that increases income yet again, and so on.
Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total
spending and income.
Change in Investment $150 billion
First Change in Consumption =
Second Change in Consumption = $
Total Change in Spending S
billion
billion
billion
Now consider the impacts of a change in taxes. The tax multiplier in this question will be
spending will change by S
billion.
thus, if taxes increase by $100 billion then
4

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