Exploring Macroeconomics
Exploring Macroeconomics
8th Edition
ISBN: 9781544337722
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
Question
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Chapter 16, Problem 8P
To determine

(a)

To compute:

The value of change in aggregate demand and change in consumption if the marginal propensity to consume was 13.

Expert Solution
Check Mark

Answer to Problem 8P

The increase in value of aggregate demandis $30billion if the marginal propensity to consume is 13

The change in consumption will be $10 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  20×32=$30billion

Calculation for change in consumption:

  ΔC=MPC×ΔY=13×$30billion=$10billion

Working note:

Calculation for Multiplier:

  m=11MPC=1113=32

Economics Concept Introduction

Marginal propensity to consume:

It refers to the aggregate increase in individual consumption due to increase in the income. It is calculated by dividing the change in consumption by the change in income. It is expressed as

  MPC=ΔCΔY

Where ΔC represents change in consumption and ΔY represents change in income.

The value of MPC lies in between 0 to 1.

Aggregate expenditure:

It refers to the total amount of goods and services produced by an economy in a period. It is calculated by the sum of expenditures undertaken by the economy:

  AE=C+I+G+NX

Here, C is consumption, I refer to investment, G represents government expenditure and NX is net export.

The increase in income is the multipliers times of the initial increase in purchase.

  Multiplier=11MPC

To determine

(b)

To compute:

The change in value of aggregate demandand change in consumption if the marginal propensity to consume was 12.

Expert Solution
Check Mark

Answer to Problem 8P

The increase in value of aggregate demandis $40 billionif the marginal propensity to consume is 12

The change in consumption will be $20 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  20×2=$40billion

Calculation for change in consumption:

  ΔC=MPC×ΔY=12×$40billion=$20billion

Working note:

Calculation for multiplier:

  m=11MPC=1112=2

Economics Concept Introduction

Marginal propensity to consume:

It refers to the aggregate increase in individual consumption due to increase in the income. It is calculated by dividing the change in consumption by the change in income. It is expressed as

  MPC=ΔCΔY

Where ΔC represents change in consumption and ΔY represents change in income.

The value of MPC lies in between 0 to 1.

Aggregate expenditure:

It refers to the total amount of goods and services produced by an economy in a period. It is calculated by the sum of expenditures undertaken by the economy:

  AE=C+I+G+NX

Here, C is consumption, I refer to investment, G represents government expenditure and NX is net export.

The increase in income is the multipliers times of the initial increase in purchase.

  Multiplier=11MPC

To determine

(c)

To compute:

The value of aggregate demand if the marginal propensity to consume was 23.

Expert Solution
Check Mark

Answer to Problem 8P

The increase in value of aggregate demandis $60 billionif the marginal propensity to consume is 23

The change in consumption will be $40 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  20×3=$60billion

Calculation for change in consumption:-

  ΔC=MPC×ΔY=23×$60billion=$40billion

Working note:

Calculation for multiplier:

  m=11MPC=1123=3

Economics Concept Introduction

Marginal propensity to consume:

It refers to the aggregate increase in individual consumption due to increase in the income. It is calculated by dividing the change in consumption by the change in income. It is expressed as

  MPC=ΔCΔY

Where ΔC represents change in consumption and ΔY represents change in income.

The value of MPC lies in between 0 to 1.

Aggregate expenditure:

It refers to the total amount of goods and services produced by an economy in a period. It is calculated by the sum of expenditures undertaken by the economy:

  AE=C+I+G+NX

Here, C is consumption, I refer to investment, G represents government expenditure and NX is net export.

The increase in income is the multipliers times of the initial increase in purchase.

  Multiplier=11MPC

To determine

(d)

To compute:

The value of aggregate demand if the marginal propensity to consume was 34.

Expert Solution
Check Mark

Answer to Problem 8P

The increase in value of aggregate demandis $80 billionif the marginal propensity to consume is 34

The change in consumption will be $60 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand with government purchase as $20 billion.

  20×4=$80billion

Calculation for change in consumption:-

  ΔC=MPC×ΔY=34×$80billion=$60billion

Working note:

Calculation for multiplier:

  m=11MPC=1134=4

Economics Concept Introduction

Marginal propensity to consume:

It refers to the aggregate increase in individual consumption due to increase in the income. It is calculated by dividing the change in consumption by the change in income. It is expressed as

  MPC=ΔCΔY

Where ΔC represents change in consumption and ΔY represents change in income.

The value of MPC lies in between 0 to 1.

Aggregate expenditure:

It refers to the total amount of goods and services produced by an economy in a period. It is calculated by the sum of expenditures undertaken by the economy:

  AE=C+I+G+NX

Here, C is consumption, I refer to investment, G represents government expenditure and NX is net export.

The increase in income is the multipliers times of the initial increase in purchase.

  Multiplier=11MPC

To determine

(e)

To compute:

The value of aggregate demand if the marginal propensity to consume was 45.

Expert Solution
Check Mark

Answer to Problem 8P

The increase in value of aggregate demandis $100 billionif the marginal propensity to consume is 45

The change in consumption will be $50 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  20×5=$100billion

Calculation for change in consumption:

  ΔC=MPC×ΔY=45×$100billion=$50billion

Working note:

Calculation for multiplier:

  m=11MPC=1145=5

Economics Concept Introduction

Marginal propensity to consume:

It refers to the aggregate increase in individual consumption due to increase in the income. It is calculated by dividing the change in consumption by the change in income. It is expressed as

  MPC=ΔCΔY

Where ΔC represents change in consumption and ΔY represents change in income.

The value of MPC lies in between 0 to 1.

Aggregate expenditure:

It refers to the total amount of goods and services produced by an economy in a period. It is calculated by the sum of expenditures undertaken by the economy:

  AE=C+I+G+NX

Here, C is consumption, I refer to investment, G represents government expenditure and NX is net export.

The increase in income is the multipliers times of the initial increase in purchase.

  Multiplier=11MPC

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