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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 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 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 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.) AGGREGATE EXPENDITURE (Bilions of dollars) AGGREGATE EXPENDITURE (Bilions of dollars) 200 180 160 120 100 80 60 140 120 100 20 0 0 A Line A A Life 40 MPC-0.5 45-Degree Line 80 100 120 REAL GDP (Bilions of dollars) MPC 0.75 160 180 45-Degree Line 100 REAL GDP (Bilions of dollars) 160 200 New AE Line New Equilibrium New AE Line New Equilibrium ? ?

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 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 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.) AGGREGATE EXPENDITURE (Bilions of dollars) AGGREGATE EXPENDITURE (Bilions of dollars) 200 180 160 120 100 80 60 140 120 100 20 0 0 A Line A A Life 40 MPC-0.5 45-Degree Line 80 100 120 REAL GDP (Bilions of dollars) MPC 0.75 160 180 45-Degree Line 100 REAL GDP (Bilions of dollars) 160 200 New AE Line New Equilibrium New AE Line New Equilibrium ? ?

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 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 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 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.) AGGREGATE EXPENDITURE (Billions of do 200 180 160 140 120 100 80 60 40 20 0 20 AE Line 0 0 20 40 + 20 MPC=0.5 MPC=0.75 200 45-Degree Line 180 160 140 120 R 100 80 60 40 AE Line 45-Degree Line 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) New AE Line + + New Equilibrium New AE Line ++ New Equilibrium (?) (?
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 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 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.) AGGREGATE EXPENDITURE (Billions of do 200 180 160 140 120 100 80 60 40 20 0 20 AE Line 0 0 20 40 + 20 MPC=0.5 MPC=0.75 200 45-Degree Line 180 160 140 120 R 100 80 60 40 AE Line 45-Degree Line 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) New AE Line + + New Equilibrium New AE Line ++ New Equilibrium (?) (?
billion. In the second In the first economy (with MPC = 0.5), the $20 billion increase in investment causes equilibrium output to increase by S economy (with MPC = 0.75), the $20 billion increase in investment causes equilibrium output to increase by S billion. Therefore, a higher MPC is associated with a ▼ multiplier. Now, confirm your graphical analysis algebraically using the formula for the simple spending multiplier: Multiplier = MIC For the first economy with an MPC of 0.5, the effect of the $20 billion increase in investment becomes the following: Change in Equilibrium Output = Change in Aggregate Expenditure x Multiplier x Using the same method, the multiplier for the second economy is
Transcribed Image Text:billion. In the second In the first economy (with MPC = 0.5), the $20 billion increase in investment causes equilibrium output to increase by S economy (with MPC = 0.75), the $20 billion increase in investment causes equilibrium output to increase by S billion. Therefore, a higher MPC is associated with a ▼ multiplier. Now, confirm your graphical analysis algebraically using the formula for the simple spending multiplier: Multiplier = MIC For the first economy with an MPC of 0.5, the effect of the $20 billion increase in investment becomes the following: Change in Equilibrium Output = Change in Aggregate Expenditure x Multiplier x Using the same method, the multiplier for the second economy is
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