CENGAGE MINDTAP Homework (Ch 16) 4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8, and the spending multiplier for this economy is 5. Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to -$240 billion This decreases income yet again, leading to a second change in consumption equal to $192 billion. The total change in demand resulting from the initial change in government spending is -$1.5 trillion The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. 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 (AD2) 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 AD₁ AD₂ (?) Q Search this course >
CENGAGE MINDTAP Homework (Ch 16) 4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8, and the spending multiplier for this economy is 5. Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to -$240 billion This decreases income yet again, leading to a second change in consumption equal to $192 billion. The total change in demand resulting from the initial change in government spending is -$1.5 trillion The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. 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 (AD2) 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 AD₁ AD₂ (?) Q Search this course >
Chapter1: Making Economics Decisions
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Transcribed Image Text:7:12 PM Fri May 19
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CENGAGE MINDTAP
Homework (Ch 16)
4. The multiplier effect of a change in government purchases
The marginal propensity to consume (MPC) for this economy is 0.8
Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining
$0.20.
PRICE LEVEL
140
Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead
to a decrease in income, creating an initial change in consumption equal to -$240 billion This decreases income yet again, leading to a
second change in consumption equal to -$192 billion
is -$1.5 trillion
The total change in demand resulting from the initial change in government spending
The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending.
135
AA
C MindTap - Cengage Learning
130
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."
125
Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by
selecting it on the graph.
120
115
110
AD
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and the spending multiplier for this economy is 5
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AD 2
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Transcribed Image Text:7:12 PM Fri May 19
<
X
B
CENGAGE MINDTAP
Homework (Ch 16)
is -$1.5 trillion
PRICE LEVEL
The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending.
140
135
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.
130
Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by
selecting it on the graph.
125
120
115
110
105
100
0
AD
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2
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4
5
OUTPUT (Trillions of dollars)
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7
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AD2
?
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