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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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3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The spending multiplier for this economy is Suppose investment in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment == -$200 billion First Change in Consumption Second Change in Consumption Total Change in Spending - - $ $ billion billion billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be spending will change by S billion. thus, if taxes decrease by $-100 billion then
Transcribed Image Text:3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The spending multiplier for this economy is Suppose investment in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment == -$200 billion First Change in Consumption Second Change in Consumption Total Change in Spending - - $ $ billion billion billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be spending will change by S billion. thus, if taxes decrease by $-100 billion then
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