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Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy.

Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph.
The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100).
The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100).
Now, suppose there is an increase of $30 billion in investment in each economy.
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of eqguilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) (? (? МРС-0.5 MPC=0.70 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 180 160 140 140 120 New Equilibrium 120 New Equilibrium 100 100 80 80 AE Line 40 AE Line 20 20 40 60 80 100 120 140 160 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) REAL GDP (Billions of dollars) In the first economy (with MPC = 0.5), the $30 billion increase in investment causes equilibrium output to increase by $ billion. In the second economy (with MPC = 0.70), the $30 billion increase in investment causes equilibrium output to increase by $ billion. Therefore, a higher MPC is associated with a v multiplier. higher or lower? Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier = For the first economy, with an MPC of 0.5, the effect of the $30 billion increase in investment is as follows: multiplier options: Change in Equilibrium Output = Change in Total Erpenditure x Multiplier 1x (1– 0.70) 1-0,70 1 (1– 0.5) Using the same method, the multiplier for the second economy is choices: (0.70, 2 , 0.3, 0.59, 3.33) Change in Total Expenditure choices: +$60 billion -$30 billion +$30 billion -$60 billion TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
Transcribed Image Text:Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of eqguilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) (? (? МРС-0.5 MPC=0.70 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 180 160 140 140 120 New Equilibrium 120 New Equilibrium 100 100 80 80 AE Line 40 AE Line 20 20 40 60 80 100 120 140 160 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) REAL GDP (Billions of dollars) In the first economy (with MPC = 0.5), the $30 billion increase in investment causes equilibrium output to increase by $ billion. In the second economy (with MPC = 0.70), the $30 billion increase in investment causes equilibrium output to increase by $ billion. Therefore, a higher MPC is associated with a v multiplier. higher or lower? Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier = For the first economy, with an MPC of 0.5, the effect of the $30 billion increase in investment is as follows: multiplier options: Change in Equilibrium Output = Change in Total Erpenditure x Multiplier 1x (1– 0.70) 1-0,70 1 (1– 0.5) Using the same method, the multiplier for the second economy is choices: (0.70, 2 , 0.3, 0.59, 3.33) Change in Total Expenditure choices: +$60 billion -$30 billion +$30 billion -$60 billion TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
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