no handwritten notes! 6. The multiplier effectConsider a hypothetical economy where there are no taxes and no foreign trade, and households spend $0.90 of each additional dollar they earn andsave the remaining $0.10. The marginal propensity to consume (MPC) for this economy is; the marginal propensity to save (MPS) for thiseconomy is]; and the multiplier for this economy isSuppose investment spending in this economy decreases by $150 billion. The decrease in investment will lead to a decrease in income, generating adecrease in consumption that decreases income yet again, and so on.Fill in the following table to show the impact of the change in investment spending on the first two rounds of consumption spending and, eventually,on total output and income.Hint: Be sure to enter a negative sign in front of the number if there is a decrease in consumption.Change in Investment Spending = -$150 billionFirst Change in Consumption = $Second Change in Consumption = $billionbillionTotal Change in Output = $billionIn reality, households will not simply split an increase in income between saving and consumption of domestic output. A fraction of the additionalincome will go toward the payment of taxes, and a fraction will go to purchases of foreign goods (imports). Accounting for the effects of taxes andimports willthe multiplier effect you found earlier.Now suppose that households in this economy allocate each additional dollar of income in the following way: Households continue to save $0.10 ofeach additional dollar of income; however, they now pay $0.10 in taxes on each additional dollar of income, and they now spend $0.20 of eachadditional dollar on imported goods. The remaining fraction of each additional dollar goes toward consumption of domestically produced output.In this case, the fraction of an additional dollar of income that is not spent on domestic output is equal toimports into consideration, the multiplier for this economy isTaking the impact of taxes and

Marginal propensity to save measures the magnitude of change in the savings due to the change in…

6. The multiplier effect Consider a hypothetical economy where there are no taxes and no foreign trade, and households spend $0.90 of each additional dollar they earn and save the remaining $0.10. The marginal propensity to consume (MPC) for this economy is ; the marginal propensity to save (MPS) for this economy is ; and the multiplier for this economy is Suppose investment spending in this economy decreases by $150 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment spending on the first two rounds of consumption spending and, eventually, on total output and income. Hint: Be sure to enter a negative sign in front of the number if there is a decrease in consumption. Change in Investment Spending = -$150 billion First Change in Consumption = $ Second Change in Consumption = $ Total Change in Output = billion billion billion In reality, households will not simply split an increase in income between saving and consumption of domestic output. A fraction of the additional income will go toward the payment of taxes, and a fraction will go to purchases of foreign goods (imports). Accounting for the effects of taxes and imports will the multiplier effect you found earlier. Now suppose that households in this economy allocate each additional dollar of income in the following way: Households continue to save $0.10 of each additional dollar of income; however, they now pay $0.10 in taxes on each additional dollar of income, and they now spend $0.20 of each additional dollar on imported goods. The remaining fraction of each additional dollar goes toward consumption of domestically produced output. In this case, the fraction of an additional dollar of income that is not spent on domestic output is equal to imports into consideration, the multiplier for this economy is . Taking the impact of taxes and