Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.50 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by $ billion. Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place.
Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.50 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by $ billion. Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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I submitted this question earlier and it was rejected because dropdown boxes were not visible. The first dropdown box has 2 choices (increase or decrease), the second has 3 choices (remains unchanged, increase, decrease). Thank you
Transcribed Image Text:Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.50 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is _______.
The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy.
Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion.
The reduction in personal consumption will lead to a decrease in aggregate demand by $ _______ billion.
**Graph Description:**
1. **Axes:**
- The horizontal axis represents Real GDP (Index numbers) ranging from 0 to 10.
- The vertical axis represents the Price Level (Billions of dollars) ranging from 0 to 100.
2. **Curves:**
- The **AD (Aggregate Demand)** curve is represented by a downward-sloping blue line.
- The **SRAS (Short-Run Aggregate Supply)** curve is represented by an upward-sloping orange line.
3. **Equilibrium:**
- The initial equilibrium is marked by the intersection of the AD and SRAS curves.
Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place.
Transcribed Image Text:**Graph Explanation:**
The graph displays two intersecting lines on a coordinate plane, depicting the relationship between the price level (in billions of dollars) and real GDP (index numbers):
- The vertical axis represents the "PRICE LEVEL" in billions of dollars, marked from 0 to 100.
- The horizontal axis represents "REAL GDP" in index numbers, ranging from 0 to 10.
**Lines:**
- **AD (Aggregate Demand):** A downward sloping blue line, indicating a negative relationship between price level and real GDP.
- **SRAS (Short-Run Aggregate Supply):** An upward sloping orange line, indicating a positive relationship between price level and real GDP.
**Intersection:**
The lines intersect at a point, showing the equilibrium where the AD and SRAS curves meet. This intersection point represents the equilibrium price level and real GDP.
**Text Explanation:**
"Since an economy’s aggregate output measured by real GDP also represents the aggregate income received by the resources of production within the economy, the decrease in aggregate demand you found equals the decrease in aggregate income. The effect of this decline in aggregate income is __________ in total saving of $__________ billion.
As personal consumption falls by $1 billion, the economy reaches a new equilibrium with an aggregate output of $_________ billion in the short run. The total amount of saving _______________ .
True or False: This is an example of the paradox of thrift.
- ○ True
- ○ False"
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