Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. 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 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. 140 135 130 125 AD₁ AD₂ ?
Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. 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 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. 140 135 130 125 AD₁ AD₂ ?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Hand written solutions are strictly prohibited
![1. The multiplier effect of a change in government purchases
Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35.
The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571
Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead
to an increase in income, generating an initial change in consumption equal to $500 billion ▼ 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
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
105
100
0
AD₁
1
3
5
4
OUTPUT (Trillions of dollars)
2
6
7
8
AD₂
?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9cbe1cc5-5530-4ffe-91b0-6f8fdef38903%2F231835c9-0149-4b1b-9819-ba2accb34703%2Fwa7ccs9_processed.png&w=3840&q=75)
Transcribed Image Text:1. The multiplier effect of a change in government purchases
Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35.
The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571
Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead
to an increase in income, generating an initial change in consumption equal to $500 billion ▼ 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
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
105
100
0
AD₁
1
3
5
4
OUTPUT (Trillions of dollars)
2
6
7
8
AD₂
?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 1 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education