EBK ECONOMICS: PRINCIPLES AND POLICY
13th Edition
ISBN: 8220100605932
Author: Blinder
Publisher: Cengage Learning US
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Chapter 11, Problem 3DQ
To determine
The impact of increase in
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3. The multiplier effect of a change in government purchases
Suppose there is some 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 is0.8 , and the spending multiplier for this economy is5 .
Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to-$240 billion . This decreases income yet again, leading to a second change in consumption equal to-$192 billion . The total change in demand resulting from the initial change in government spending is-$1.5 trillion .
The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve…
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EBK ECONOMICS: PRINCIPLES AND POLICY
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- Consider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) (2,40) Delta Air Lines ($ million) Low Fare ($ million) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as…arrow_forwardConsider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) Delta Air Lines ($ million) Low Fare ($ million) (2,40) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as…arrow_forwardPlease correct answer and don't used hand raiting and don't used Ai solutionarrow_forward
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