Answered: Due to an increase in consumer wealth,…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

Westlandia
Eastlandia
Incremental
Total
Total
change
in GDP
Incremental
change
in GDP
AC - $40 billion
change
in GDP
change
in GDP
Rounds
Rounds
1
AC- $40 billion
MPC x AC -
2
MPC x AC-
3
MPC x MPC × AC=
3
MPC × MPC × AC =
MPC x MPC x MPC x AC -
MPC x MPC x MPC x AC -
Total
change
in GDP
Total
change
in GDP
(1/(1 - МPC)) х ДС- ?
(1/(1 - МPС) х ДС - ?
1.

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