Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and savethe remainder, the expenditure multiplier for this economy isThe 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. Inaddition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personalconsumption 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 thereduction in personal consumption has taken place.(?10090SRASAD807060SRAS504030AD20100 2468101214161820PRICE LEVEL (Billions of dollars) 10090SRASAD807060SRAS50AD2010268101214161820REAL GDP (Index numbers)Since an economy's aggregate output measured by real GDP also represents the aggregate income received by the resources of production within theeconomy, the decrease in aggregate demand you found equals the decrease in aggregate income. The effect of this decline in aggregate incomeisv 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 savingTrue or False: This is an example of the paradox of thrift.O TrueFalsePRICE LEVEL (Billions of dollars)

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Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is

Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

Problem 4TY

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