Consider a 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 increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $320 billion. This increases income yet again, causing a second change in consumption equal to $256 billion The total change in demand resulting from the initial change in government spending is $2 trillion ($2,000 billion) 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 spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD). You can see the slope of AD, by selecting it on the graph. EVEL (CPI) 140 135 130 125 120 AD AD₂ ?

Consider a 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 increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $320 billion. This increases income yet again, causing a second change in consumption equal to $256 billion The total change in demand resulting from the initial change in government spending is $2 trillion ($2,000 billion) 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 spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD). You can see the slope of AD, by selecting it on the graph. EVEL (CPI) 140 135 130 125 120 AD AD₂ ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

100%

Use the green line (triangle symbol) to plot the new aggregate demand curve (AD) after the spending multiplier effect takes place.
Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD)). You can see the slope of AD, by
selecting it on the graph.
PRICE LEVEL (CPI)
140
135
130
125
120
115
110
105
100
0
AD,
1
2
REAL GDP (Trillions of dollars)
AD₂
?

1. The multiplier effect of a change in government purchases
Consider a 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
Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead
to an increase in income, generating an initial change in consumption equal to $320 billion . This increases income yet again, causing a
second change in consumption equal to $256 billion
$2 trillion ($2,000 billion)
The total change in demand resulting from the initial change in government spending 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 (AD₂) after the spending multiplier effect takes place.
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 AD, by
selecting it on the graph.
PRICE LEVEL (CPI)
140
135
130
120
115
.
and the spending multiplier for this economy is 5
AD₁
AD₂

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