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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 $0.85 of each additional dollar they earn and save the remaining $0.15. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $300 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases 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 and the spending multiplier for this economy is 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 (AD:) 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 (AD). You can see the slope of AD1 by selecting it on the graph.

4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.85 of each additional dollar they earn and save the remaining $0.15. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $300 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases 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 and the spending multiplier for this economy is 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 (AD:) 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 (AD). You can see the slope of AD1 by selecting it on the graph.

Economics Today and Tomorrow, Student Edition
Economics Today and Tomorrow, Student Edition
1st Edition
ISBN:9780078747663
Author:McGraw-Hill
Publisher:McGraw-Hill
Chapter5: Buying The Necessities
Section: Chapter Questions
Problem 20AA
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selecting it on the graph. PRICE LEVEL 140 135 130 6 120 115 110 106 100 AD₁ 1 5 OUTPUT (Trillions of dollars) 7 AD₂ @
Transcribed Image Text:selecting it on the graph. PRICE LEVEL 140 135 130 6 120 115 110 106 100 AD₁ 1 5 OUTPUT (Trillions of dollars) 7 AD₂ @
4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.85 of each additional dollar they earn and save the remaining $0.15. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $300 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases 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 and the spending multiplier for this economy 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 (AD:) 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 (AD). You can see the slope of AD, by selecting it on the graph.
Transcribed Image Text:4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.85 of each additional dollar they earn and save the remaining $0.15. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $300 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases 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 and the spending multiplier for this economy 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 (AD:) 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 (AD). You can see the slope of AD, by selecting it on the graph.
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