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 aggregate 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 aggregate 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 aggregate expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is a decrease of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.)
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 aggregate 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 aggregate 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 aggregate expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is a decrease of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.)
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
Problem 1TY
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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 aggregate 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 aggregate 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 aggregate expenditure line has a slope of 0.70 and passes through the point (100, 100).
Now, suppose there is a decrease of $30 billion in investment in each economy.
Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a
black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line
on the graph by selecting it.)
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