MPC=0.7520045-Degree Line180New AE Line180140120New Equilibrium100806040AE Line2020406080100120140160180200REAL INCOME (Billions of dollars)In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by $billion. In thesecond economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by sbillion.Therefore, a lower MPC is associated with amultiplier.Now, confirm your graphical analysis algebraically using the formula for the multiplier:Multiplier = H MICFor the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following:Change in Equilibrium Real IncomeChange in Planned Expenditure x Multiplier%3DUsing the same method, the multiplier for the second economy isPLANNED EXPENDITURE (Billions of dollars)I| |||| 7. The multiplier and the MPCConsider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium withreal income and planned expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes thatchange with income. The grey lines show the 45-degree line on each graph.The first economy's MPC is 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100o, 100).The second economy's MPC is 0.75. Therefore, its initial planned 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 planned investment in each economy.Place a green line (triangle symbol) on each of the preceding graphs to indicate the new planned expenditure line for each economy. Then place ablack point (plus symbol) on each graph showing the new level of equilibrium income. (Hint: You can see the slope and vertical axis intercept of a lineon the graph by selecting it.)MPC=0.545-Degree Line200180New AE Line160140120New Equilibrium1008060AE Line2020406080100 120140160180200REAL INCOME (Billions of dollars)PLANNED EXPE NDITURE (Billions of dollars)

We are going to use concepts such as Aggregate expenditure and Planned expenditure to answer this question.Answer 1) MPC for first economy =0.5 We know that, Multiplier for the first economy = 1/(1-MPC) = 1/0.5 = 2 Therefore, if planned investment increases by $20 billion then change in equilibrium income can be calculated as below. Change in Equilibrium Income for the first economy = Multiplier for the first economy* Change in planned investment = 2*(+$ 20 bn) = $40 bn. Answer 2) MPC for second economy =0.75 We know that, Multiplier for the second economy = 1/(1-MPC) = 1/0.25 = 4 Change in Equilibrium Income for the second economy = Multiplier for the second economy* Change in planned investment = 4*(+$ 20 bn) = $80 bn. Answer 3) Multiplier =(1/(1-MPC)), therefore, if MPC increases then multiplier will decrease; similarly, if MPC decreases then multiplier will increase. Hence, lower MPC is associated with higher multiplier.

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MPC-0.75 45-Degree Line 200 180 New AE Line 100 140 120 New Equilibrium 100 80 60 40 AE Line 20 o 20 40 0 80 100 120 140 180 180 200 REAL INCOME (Billins of dollars) In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by S second economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by S | billion. In the billion. Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: Multiplier = AC For the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following: Change in Equilibrium Real Income = Change in Planned Expenditure × Multiplier Using the same method, the multiplier for the second economy is PLANNED EXPENDITURE (Billions of dollars) I| ||||

MPC-0.75 45-Degree Line 200 180 New AE Line 100 140 120 New Equilibrium 100 80 60 40 AE Line 20 o 20 40 0 80 100 120 140 180 180 200 REAL INCOME (Billins of dollars) In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by S second economy (with MPC = 0.75), the $20 billion increase in planned investment causes equilibrium income to increase by S | billion. In the billion. Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: Multiplier = AC For the first economy with an MPC of 0.5, the effect of the $20 billion increase in planned investment becomes the following: Change in Equilibrium Real Income = Change in Planned Expenditure × Multiplier Using the same method, the multiplier for the second economy is PLANNED EXPENDITURE (Billions of dollars) I| ||||

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section11.A: Graphical Treatment Of Taxes And Fiscal Policy

Problem 3TY

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1. If an economy has an MPC of 0.9 what is the multiplier? 2. If an economy has an MPS of 0.2 what is the multiplier? 3. If an economy has an MPC of .08 and the government needs to close a recessionary gap of 20 Billion dollars how much government spending should occur? 4. If an economy has an MPS of .05 and the government needs to close an inflationary gap of 10 Billion dollars how much should government spending decrease?
6. Graphically illustrate the effect of an increase in government purchases. Explain the government spending multiplier effect by using at least 200 words.
True or False? Explain: The multiplier effect is likely to be greatest when the government spending is targeted at the poorest The poor will always spend most of the money they get as benefits as soon as possible Multiplier effect does not depend on who receives the money The richest people will spend a larger proportion of their money than the poorest
A3
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. Using the appropriate formulas and an MPC of 0.85, calculate the multipliers for each of the two scenarios. Next, calculate the overall impact each will have on the increase in money circulating through the economy. To stimulate an economy in a serious recession, the government spends a total of $700 million to send each person a stimulus check worth $600. 2.To stimulate an economy in a serious recession, the government spends a total of $700 million to construct nationwide high-speed internet infrastructure so that all areas of the country, especially rural areas, will have high speed internet service. (Enter response here.)
1. Suppose the households in a hypothetical economy has the following consumption function C= a + cYd. Where is the disposable income. The government in this economy imposes a tax rate of to households’ income (ex. A means that 10% of households’ income goes to tax payments). a. What is the equation that describes the disposable income of households? b. What is the Planned Expenditure Equation? Assume that government expenditure is exogenous and Investment function is given by the equation I = I-br Where is the interest rate. c. Derive the equilibrium output in the goods market and show that the multiplier in this model is 1/1c(1-t). d. How does and the tax rate affects this multiplier (e.g., what happens to multiplier if c increases cet.par. , or if tax rate increases, cet.par)?
Assume that, without taxes, the consumption schedule for an economy is as shown in the first two columns of the table below. Suppose that a lump-sum (regressive) tax of $10 billion is imposed at all levels of GDP. a. Calculate the tax rate at each level of GDP and enter the tax, disposable income, consumption, and tax rate in the table.Instructions: For the tax, disposable income, and consumption after tax, enter your answers as whole numbers. For the tax rate, round your answers to 2 decimal places.SEE PICTURE!!! b. Compare the MPC and the multiplier with those of the pretax consumption schedule. Instructions: For the MPC, round your answers to 1 decimal place. For the multiplier, enter your answers as whole numbers. SEE PICTURE!!!
. Suppose an economy is represented by the following equations.Consumption function C = 100 + 0.8YdPlanned investment I = 38Government spending G = 75Exports EX = 25Imports IM = 0.05YdAutonomous Taxes T = 40Planned aggregate expenditure AE = C + I + G + (EX - IM)a. By using the above information calculate the equilibrium level of income for thiseconomy. b. Calculate the value of expenditure multiplier. c. Suppose that government spending is increased by 5, what will happen to theequilibrium income level?
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y Tools ips ps « CENGAGE MINDTAP Homework (Ch 15) Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is, and the spending multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD2) is…
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