Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to ▼. This decreases income yet again, leading to 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 multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph.

Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to ▼. This decreases income yet again, leading to 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 multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: suppose the government wishes to illuminate recessionary of a gdp of 100 billion in the MPC is .075.…

A: To calculate increase in government spending we have to first calculate the spending multiplier.

Q: Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional…

A: The aggregate demand/aggregate supply model is a model that shows what decides total supply or total…

Q: If taxpayers are known to save 7% of any additional money they receive, and to spend 93%, how much…

A: I am answering this according to a $10 tax cut as you have mentioned both $8 and $10 in the…

Q: Consider an open economy described by the following equations: C = 400 + 0.90 (Y – T)…

A: An open economy implies that the economy exchanges goods and services with other countries.

Q: Suppose the MPC is .6 and consumption increases by $8 billion. Consequently, total income through…

A: Given information, Change in consumption: $8 billion (increase) MPC: 0.6 Find: change in total…

Q: Suppose that the marginal propensity to consume is 0.75. If the government decreases spending by…

A: The Marginal Propensity to Consume (MPC) is a metric that assesses how sensitive consumption is to…

Q: Suppose actual real GDP is $13.19 trillion, potential real GDP is $12.96 trillion, the marginal…

A: Marginal Propensity to Consume(MPC): The marginal Propensity to Consume refers to the proportion of…

Q: use the following equation. C = 50 + 0.6(Y – T) 9) What is autonomous consumption in this economy?…

A: Since you have asked multiple question, we will solve the first question for you. If you want any…

Q: Suppose economists observe that an increase in government spending of $11 billion raises the total…

A: Crowding Out Effect:In economics, the Crowding Out Effect means the situationwhere increased…

Q: real GDP = (Change in Taxes) X Change in equilibrium (Tax Multiplier) Change in equilibrium real GDP…

A: Initial change in the tax or investment causes multiple change in final income. The value of…

Q: The Japanese government decides to stimulate the economy by increasing direct spending by $70…

A: Given,Increase in government spending: △G=$70 billionFinal change in real GDP: △Y=$280 billion The…

Q: Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar…

A: Aggregate demand in the economy is determined by the aggregate expenditure that is incurred in the…

Q: Consider an economy described by the following equations: C = 300 + 0.90 (Y – T)…

A: Government spending multiplier = 1 / 1 - MPC Government spending multiplier = - MPC / 1 - MPC

Q: The economy is described by the following functions: Shown in Picture where ?t is the tax rate.…

A: Multiplier associated with government purchases is the total change in income with change in…

Q: An economy has the following consumption function: C=$200+0.8DI . The government budget is balanced,…

A: The equilibrium in a macroeconomic model emerges when the aggregate demand for final goods , which…

Q: Suppose the government enacts a stimulus program composed of $400 billion of new government spending…

A: It is given that the government increases government spending by $400 billion and it is also given…

Q: Assume that in 2015, the following prevails in the Republic of Nurd: Government spending (G) = $0…

A: Y is given as $200 Thus, Yd will be: Yd=Y-TYd=200-0Yd=200 (Since taxes is 0) Now, consumption and…

Q: Suppose that autonomous consumption is 1,000, government purchases are 2,000, planned investment…

A: GDP refers to the sum of consumption, investment, government spending and net exports in an open…

Q: Suppose the government seeks to achieve a balanced budget by levying taxes of $50 billion and making…

A: If MPC=0.8 then MPS=1-MPC MPS=1-0.8 MPS=0.2

Q: n a closed economy such that: C = 100 + 0.8 (Y – T) Md = 0.25 Y - 50 R I = 700 - 50 R…

A: The basis of the IS-LM model is an analysis of the money market and an analysis of the goods market,…

Q: If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will…

A: Marginal Propensity to Consume, is a measure in economics that indicates the proportion of an…

Q: If the MPC in an economy is 0.9, a $4 billion increase in government spending will ultimately…

A: MPC or Marginal Propensity to Consume measures the increase in spending with the increase in…

Q: Suppose an economy has an MPC = 0.875. 1. If government spending increase by $100, how much…

A: In economics, the marginal propensity to consume is a metric that quantifies induced consumption,…

Q: What can we predict about the effect on consumption of an increase in government spending? A)…

A: Consumption function is a sum of autonomous consumption and imputed consumption.

Q: Consider a hypothetical economy. Households spend $0.90 of each additional dollar they earn and save…

A: The total of net exports, government spending, investment spending, and consumption spending is…

Q: In a private closed economy where MPC= 0.8, if consumers reduce their spending by $20 billion and…

A: The macroeconomic equilibrium in an economy is determined by the aggregate demand and aggregate…

Q: Suppose that C = 100+ 0.75(Y -100), I= 50, G = 30, and X- M = 100, all in billions of dollars. What…

A: Gross domestic product is the final combination of goods and services in a country. GDP is an…

Q: Fill in the missing blanks in the following table. Assume for simplicity that taxes are zero. Also…

A: Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS):MPC refers to a fraction…

Q: Suppose the following list of events describes all of the economic activity resulting from an…

A: Economic activity encompasses the entirety of exchanges concerning the creation, dissemination, and…

Question

100%

Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that
there is no "crowding out."
Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by
selecting it on the graph.
PRICE LEVEL
140
135
130
125
120
115
110
105
100
O
9
AD₁
1
1
3
4
5
OUTPUT (Trillions of dollars)
2
6
7
8
AD₂
?

Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining
$0.25.
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 decrease government purchases by $250 billion. The decrease in government spending will lead
to a decrease in income, creating an initial change in consumption equal to
This decreases income yet again, leading to 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 multiplier effect takes place. For simplicity, assume that
there is no "crowding out."
Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by
selecting it on the graph.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Define MPC

VIEW

Step 2: Calculation of Multiplier

VIEW

Step 3: Calculation of change in consumption

VIEW

Step 4: Draw the graph

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Pretend you are a member of the Council of Economic Advisers and are trying to persuade the members of the House Appropriations Committee to purchase $100 billion worth of new materials, in part to stimulate the economy. Explain to the members how the multiplier process will work.
Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as (1) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period? (2) spending $10 billion, then by how much would total spending increase over an infinite period?
If the marginal propensity to consume is 0.9, then the tax multiplier will be: Group of answer choices impossible to determine. greater than 10. less than 10. zero, because there is no multiplier effect from taxes.
Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to This decreases 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 (AD 2) is parallel to the initial aggregate demand curve…
If the MPC = 3/5, then the government purchases multiplier is 5/3 5/2 5 1.5
The Italian government decides to stimulate the economy by sending checks worth $70 billion to Italian consumers. If the government spending multiplier is 1.5 , calculate the MPC to determine the final change in Italy's real GDP due to the transfer. Please give your answer as a whole number in billions of dollars. $ billion The Greek government decides to introduce new austerity measures, which reduce government direct spending by $16 billion. Greece has a marginal propensity to consume of 0.6 . What will be the final change in real GDP as a result of this decreased spending? Please give your answer as a whole number in billions of dollars. The Japanese government decides to stimulate the economy by increasing direct spending by $70 billion. If the final change in real GDP is $280 billion, what is Japanese consumers' marginal propensity to consume (MPC)? Please round your answer to two decimal places
Suppose an initial increase in government spending (G) increased GDP by $50,000. If he simple spending multiplier is 2.5, the size of the initial government spending was
Why might politicians prefer government spending increases instead of tax cuts to increase aggregate demand? tax multipliers are larger than government spending multipliers government spending multipliers are larger than tax multipliers politicians can direct government spending to their supporters politicians can direct tax cuts to their supporters government spending multipliers are larger than tax multipliers and politicians can direct government spending to their supporters
If the marginal propensity to consume equals 0.80, the tax rate equals 0.20, and the marginal propensity to import equals 0.05, what is the value of the government purchases multiplier? The government purchases multiplier is equal to (enter your response rounded to two decimal places).
The marginal propensity to consume out of permanent income equals 0.9 and the marginal propensity to consume out of transitory income equals 0.1. Suppose that there is an emergency increase in government spending of $200 billion to repair infrastructure. The spending takes place within a year. The spending increase is financed by a one-time increase in taxes. Prior to the increase in government spending, permanent income equals $9,600 billion and transitory income equals zero. (a) Compute the amounts of consumption expenditures and private saving prior to the tax increase. (b) Compute the amount of changes in consumption expenditures and private saving, given that the tax increase lasts for only one year. (c) Compute the initial change in aggregate demand that results from this combination of increases in government spending and taxes.
Suppose the MPC in an economy is 0.95. What should the government do with taxes if they want to increase Total Spending by $665? Show your work
In the economy of Keynesian Island, autonomous consumption expenditure is $50 million, and the marginal propensity to consume is 0.8. Investment is $160 million, government expenditure is $190 million, and net taxes are $250 million. Investment, government purchases, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. If the government increases its purchases by $200 million, what will be the change in the economy's equilibrium real GDP? Show the change on the graph as well.