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The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.70. Therefore, its initial planned expenditure line has a slope of 0.70 and passes through the point (100, 100).

The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.70. Therefore, its initial planned expenditure line has a slope of 0.70 and passes through the point (100, 100).

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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PLANNED EXPENDITURE (Billions of dollars) 200 160 140 120 Z 100 80 60 AE Line 180 40 20 0 0 20 MPC-0.70 40 60 80 100 120 140 160 REAL INCOME (Billions of dollars) 45-Degree Line Multiplier 1-MPC 180 200 IIII - Δ New AE Line In the first economy (with MPC = 0.5), the $30 billion decrease in planned investment causes equilibrium income to decrease by $ the second economy (with MPC = 0.70), the $30 billion decrease in planned investment causes equilibrium income to decrease by S Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: New Equilibrium Using the same method, the multiplier for the second economy is For the first economy with an MPC of 0.5, the effect of the $30 billion decrease in planned investment becomes the following: (?) Change in Equilibrium Real Income = Change in Planned Expenditure x Multiplier X X billion. In billion.
Transcribed Image Text:PLANNED EXPENDITURE (Billions of dollars) 200 160 140 120 Z 100 80 60 AE Line 180 40 20 0 0 20 MPC-0.70 40 60 80 100 120 140 160 REAL INCOME (Billions of dollars) 45-Degree Line Multiplier 1-MPC 180 200 IIII - Δ New AE Line In the first economy (with MPC = 0.5), the $30 billion decrease in planned investment causes equilibrium income to decrease by $ the second economy (with MPC = 0.70), the $30 billion decrease in planned investment causes equilibrium income to decrease by S Therefore, a lower MPC is associated with a multiplier. Now, confirm your graphical analysis algebraically using the formula for the multiplier: New Equilibrium Using the same method, the multiplier for the second economy is For the first economy with an MPC of 0.5, the effect of the $30 billion decrease in planned investment becomes the following: (?) Change in Equilibrium Real Income = Change in Planned Expenditure x Multiplier X X billion. In billion.
Consider two hypothetical economies that are perfectly similar except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned expenditure equal to $100 billion, as given by the black points (plus signs) on the following two graphs. Assume that both economies are closed to trade, and that neither economy has taxes that change with income. The graphs also plot the 45-degree line. The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.70. Therefore, its initial planned expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is a decrease of $30 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 a black 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 line on the graph by selecting it.) PLANNED EXPENDITURE (Billions of dollars) 200 180 160+ 140 120 100 80 60 40 20 0 0 AE Line 20 MPC-0.5 40 45-Degree Line 60 80 100 120 REAL INCOME (Billions of dollars) 140 160 180 200 New AE Line New Equilibrium
Transcribed Image Text:Consider two hypothetical economies that are perfectly similar except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned expenditure equal to $100 billion, as given by the black points (plus signs) on the following two graphs. Assume that both economies are closed to trade, and that neither economy has taxes that change with income. The graphs also plot the 45-degree line. The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.70. Therefore, its initial planned expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is a decrease of $30 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 a black 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 line on the graph by selecting it.) PLANNED EXPENDITURE (Billions of dollars) 200 180 160+ 140 120 100 80 60 40 20 0 0 AE Line 20 MPC-0.5 40 45-Degree Line 60 80 100 120 REAL INCOME (Billions of dollars) 140 160 180 200 New AE Line New Equilibrium
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