Attempts Average / 3 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is and the multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will This decreases income yet again, causing a lead to a decrease in income, generating an initial change in consumption equal to The total change in demand resulting from the initial change in government spending second change in consumption equal to is The following graph shows the aggregate demand curve (AD₁) 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 (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 (AD1). You can see the slope of AD₁ by selecting it on the graph. PRICE LEVEL 140 135 130 125 120 115 110 105 AD AD 100 0 1 2 3 4 5 B REAL GDP (Trillions of dollars) CO 8
Attempts Average / 3 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is and the multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will This decreases income yet again, causing a lead to a decrease in income, generating an initial change in consumption equal to The total change in demand resulting from the initial change in government spending second change in consumption equal to is The following graph shows the aggregate demand curve (AD₁) 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 (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 (AD1). You can see the slope of AD₁ by selecting it on the graph. PRICE LEVEL 140 135 130 125 120 115 110 105 AD AD 100 0 1 2 3 4 5 B REAL GDP (Trillions of dollars) CO 8
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 1.4P
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Transcribed Image Text:Attempts
Average / 3
4. The multiplier effect of a change in government purchases
Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25.
The marginal propensity to consume (MPC) for this economy is
and the multiplier for this economy is
Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will
This decreases income yet again, causing a
lead to a decrease in income, generating an initial change in consumption equal to
The total change in demand resulting from the initial change in government spending
second change in consumption equal to
is
Transcribed Image Text:The following graph shows the aggregate demand curve (AD₁) 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 (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 (AD1). You can see the slope of AD₁ by
selecting it on the graph.
PRICE LEVEL
140
135
130
125
120
115
110
105
AD
AD
100
0
1
2
3
4
5
B
REAL GDP (Trillions of dollars)
CO
8
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