4. 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. 0.4, 0.6, 1, 1.67, or 2.5 The marginal propensity to consume (MPC) for this economy is and the multiplier for this economy is 0.4, 0.6, 1, 1.67, or 2.5 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 $500 billion, $120 billion, $1 trillion, $0.6 trillion, $0.8 trillion, $2.4 trillion $1,000 billion, $144 billion, $160 billion $240 billion, $160 billion, $1,000 billion, $500 billion, or $120 billion The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. On the following graph, 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 (AD) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph. PRICE LEVEL 140 AD₁ 135 130 125 120 115 110 105 100 0 1 2 3 4 5 REAL GDP (Trillions of dollars) B 7 8 A AD2 Do graph
4. 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. 0.4, 0.6, 1, 1.67, or 2.5 The marginal propensity to consume (MPC) for this economy is and the multiplier for this economy is 0.4, 0.6, 1, 1.67, or 2.5 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 $500 billion, $120 billion, $1 trillion, $0.6 trillion, $0.8 trillion, $2.4 trillion $1,000 billion, $144 billion, $160 billion $240 billion, $160 billion, $1,000 billion, $500 billion, or $120 billion The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. On the following graph, 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 (AD) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph. PRICE LEVEL 140 AD₁ 135 130 125 120 115 110 105 100 0 1 2 3 4 5 REAL GDP (Trillions of dollars) B 7 8 A AD2 Do graph
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:4. 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.
0.4, 0.6, 1, 1.67,
or 2.5
The marginal propensity to consume (MPC) for this economy is
and the multiplier for this economy is
0.4, 0.6, 1, 1.67,
or 2.5
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
$500 billion, $120 billion,
$1 trillion, $0.6 trillion, $0.8 trillion,
$2.4 trillion
$1,000 billion, $144
billion, $160 billion
$240 billion, $160 billion, $1,000
billion, $500 billion, or $120
billion
The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending.
On the following graph, 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 (AD) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by
selecting it on the graph.
PRICE LEVEL
140
AD₁
135
130
125
120
115
110
105
100
0
1
2
3
4
5
REAL GDP (Trillions of dollars)
B
7
8
A
AD2
Do graph
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