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 $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion. The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2AD2) is parallel to the initial aggregate demand curve (AD1AD1). You can see the slope of AD1AD1 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 $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion. The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2AD2) is parallel to the initial aggregate demand curve (AD1AD1). You can see the slope of AD1AD1 by selecting it on the graph.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
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 $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion.
The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out."
Hint: Be sure that the new aggregate demand curve (AD2AD2) is parallel to the initial aggregate demand curve (AD1AD1). You can see the slope of AD1AD1 by selecting it on the graph.
Transcribed Image Text:PRICE LEVEL
140
135
130
125
120
115
110
105
100
0
AD
1
1
2
3
4
5
OUTPUT (Trillions of dollars)
6
7
8
◄
AD2
?
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