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Right click the image and click open image in new tab to see full and clear image 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 total 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 total 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 total expenditure line has a slope of 0.75 and passes through the point (100, 100).   Now, suppose there is a decrease of $20 billion in investment in each economy.

Right click the image and click open image in new tab to see full and clear image 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 total 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 total 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 total expenditure line has a slope of 0.75 and passes through the point (100, 100).   Now, suppose there is a decrease of $20 billion in investment in each economy.

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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Right click the image and click open image in new tab to see full and clear image

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 total 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 total 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 total expenditure line has a slope of 0.75 and passes through the point (100, 100).
 
Now, suppose there is a decrease of $20 billion in investment in each economy.
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 total 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 total 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 total expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is a decrease of $20 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total 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.) (? (?) МРC-0.5 МРC-0.75 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 160 160 E 140 140 120 New Equilibrium New Equilibrium 120 100 100 80 60 AE Line 40 AE Line 20 20 20 40 60 80 100 120 140 180 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) REAL GDP (Billions of dollars) In the first economy (with MPC = 0.5), the $20 billion decrease in investment causes equilibrium output to decrease by $ billion. In the second economy (with MPC = 0.75), the $20 billion decrease in investment causes equilibrium output to decrease by $ billion. Therefore, a lower MPC is associated with a multiplier. (higher or lower?) Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier = 1-MBG For the first economy, with an MPC of 0.5, the effect of the $20 billion decrease in investment is as follows: multiplier options: Change in Equilibrium Output = Change in Total Expenditure x Multiplier 1 x (1– 0.5) Using the same method, the multiplier for the second economy is 1x (1– 0.75) 0.75 change in total expenditure options: 2 4 +$20 billion 0.25 +$40 billion 0.57 -$40 billion -$20 billion TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
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 total 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 total 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 total expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is a decrease of $20 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total 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.) (? (?) МРC-0.5 МРC-0.75 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 160 160 E 140 140 120 New Equilibrium New Equilibrium 120 100 100 80 60 AE Line 40 AE Line 20 20 20 40 60 80 100 120 140 180 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) REAL GDP (Billions of dollars) In the first economy (with MPC = 0.5), the $20 billion decrease in investment causes equilibrium output to decrease by $ billion. In the second economy (with MPC = 0.75), the $20 billion decrease in investment causes equilibrium output to decrease by $ billion. Therefore, a lower MPC is associated with a multiplier. (higher or lower?) Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier = 1-MBG For the first economy, with an MPC of 0.5, the effect of the $20 billion decrease in investment is as follows: multiplier options: Change in Equilibrium Output = Change in Total Expenditure x Multiplier 1 x (1– 0.5) Using the same method, the multiplier for the second economy is 1x (1– 0.75) 0.75 change in total expenditure options: 2 4 +$20 billion 0.25 +$40 billion 0.57 -$40 billion -$20 billion TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
? MPC=0.5 MPC=0.75 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 160 160 140 140 120 New Equilibrium New Equilibrium 120 100 100 80 80 60 60 AE Line 40 40 AE Line 20 20 60 REAL GDP (Billions of dollars) 20 40 80 100 120 140 160 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
Transcribed Image Text:? MPC=0.5 MPC=0.75 200 45-Degree Line 45-Degree Line 200 180 180 New AE Line New AE Line 160 160 140 140 120 New Equilibrium New Equilibrium 120 100 100 80 80 60 60 AE Line 40 40 AE Line 20 20 60 REAL GDP (Billions of dollars) 20 40 80 100 120 140 160 180 200 20 40 60 80 100 120 140 180 180 200 REAL GDP (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars) TOTAL EXPENDITURE (Billions of dollars)
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