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 $\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$3$}\right..$

Answer to Problem 8P

The increase in value of aggregate demandis $\$30\text{billion}$ if the marginal propensity to consume is $\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$3$}\right.$

The change in consumption will be $10 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  $20\times \frac{3}{2}=\$30\text{billion}$

Calculation for change in consumption:

  $\begin{array}{c}\text{ΔC}=\text{MPC}\times \text{ΔY}\\ =\frac{1}{3}\times \$30\text{billion}\\ =\text{\$10}\text{billion}\end{array}$

Working note:

Calculation for Multiplier:

  $\begin{array}{c}\text{m}=\frac{1}{1-\text{MPC}}\\ =\frac{1}{1-\frac{1}{3}}\\ =\frac{3}{2}\end{array}$

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

  $\text{MPC}=\frac{\text{ΔC}}{\text{ΔY}}$

Where $\Delta \text{C}$ represents change in consumption and $\Delta \text{Y}$ 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:

  $\text{AE}=\text{C}+\text{I}+\text{G}+\text{NX}$

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.

  $\text{Multiplier}=\frac{1}{1-\text{MPC}}$

To determine

(b)

To compute:

The change in value of aggregate demandand change in consumption if the marginal propensity to consume was $\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right..$

Answer to Problem 8P

The increase in value of aggregate demandis $40 billionif the marginal propensity to consume is $\raisebox{1ex}{$1$}\!\left/ \!\raisebox{-1ex}{$2$}\right.$

The change in consumption will be $20 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  $20\times 2=\$40\text{billion}$

Calculation for change in consumption:

  $\begin{array}{c}\text{ΔC}=\text{MPC}\times \text{ΔY}\\ =\frac{1}{2}\times \$40\text{billion}\\ =\text{\$20}\text{billion}\end{array}$

Working note:

Calculation for multiplier:

  $\begin{array}{c}\text{m}=\frac{1}{1-\text{MPC}}\\ =\frac{1}{1-\frac{1}{2}}\\ =2\end{array}$

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

  $\text{MPC}=\frac{\text{ΔC}}{\text{ΔY}}$

Where $\Delta \text{C}$ represents change in consumption and $\Delta \text{Y}$ 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:

  $\text{AE}=\text{C}+\text{I}+\text{G}+\text{NX}$

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.

  $\text{Multiplier}=\frac{1}{1-\text{MPC}}$

To determine

(c)

To compute:

The value of aggregate demand if the marginal propensity to consume was $\raisebox{1ex}{$2$}\!\left/ \!\raisebox{-1ex}{$3$}\right..$

Answer to Problem 8P

The increase in value of aggregate demandis $60 billionif the marginal propensity to consume is $\raisebox{1ex}{$2$}\!\left/ \!\raisebox{-1ex}{$3$}\right.$

The change in consumption will be $40 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  $20\times 3=\$60\text{billion}$

Calculation for change in consumption:-

  $\begin{array}{c}\text{ΔC}=\text{MPC}\times \text{ΔY}\\ =\frac{2}{3}\times \$60\text{billion}\\ =\text{\$40}\text{billion}\end{array}$

Working note:

Calculation for multiplier:

  $\begin{array}{c}\text{m}=\frac{1}{1-\text{MPC}}\\ =\frac{1}{1-\frac{2}{3}}\\ =3\end{array}$

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

  $\text{MPC}=\frac{\text{ΔC}}{\text{ΔY}}$

Where $\Delta \text{C}$ represents change in consumption and $\Delta \text{Y}$ 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:

  $\text{AE}=\text{C}+\text{I}+\text{G}+\text{NX}$

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.

  $\text{Multiplier}=\frac{1}{1-\text{MPC}}$

To determine

(d)

To compute:

The value of aggregate demand if the marginal propensity to consume was $\raisebox{1ex}{$3$}\!\left/ \!\raisebox{-1ex}{$4$}\right..$

Answer to Problem 8P

The increase in value of aggregate demandis $80 billionif the marginal propensity to consume is $\raisebox{1ex}{$3$}\!\left/ \!\raisebox{-1ex}{$4$}\right.$

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.

  $20\times 4=\$80\text{billion}$

Calculation for change in consumption:-

  $\begin{array}{c}\text{ΔC}=\text{MPC}\times \text{ΔY}\\ =\frac{3}{4}\times \$80\text{billion}\\ =\text{\$60}\text{billion}\end{array}$

Working note:

Calculation for multiplier:

  $\begin{array}{c}\text{m}=\frac{1}{1-\text{MPC}}\\ =\frac{1}{1-\frac{3}{4}}\\ =4\end{array}$

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

  $\text{MPC}=\frac{\text{ΔC}}{\text{ΔY}}$

Where $\Delta \text{C}$ represents change in consumption and $\Delta \text{Y}$ 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:

  $\text{AE}=\text{C}+\text{I}+\text{G}+\text{NX}$

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.

  $\text{Multiplier}=\frac{1}{1-\text{MPC}}$

To determine

(e)

To compute:

The value of aggregate demand if the marginal propensity to consume was $\raisebox{1ex}{$4$}\!\left/ \!\raisebox{-1ex}{$5$}\right..$

Answer to Problem 8P

The increase in value of aggregate demandis $100 billionif the marginal propensity to consume is $\raisebox{1ex}{$4$}\!\left/ \!\raisebox{-1ex}{$5$}\right.$

The change in consumption will be $50 billion.

Explanation of Solution

Given information:

Government purchase is $20 billion.

Calculation for increase in aggregate demand:

  $20\times 5=\$100\text{billion}$

Calculation for change in consumption:

  $\begin{array}{c}\text{ΔC}=\text{MPC}\times \text{ΔY}\\ =\frac{4}{5}\times \$100\text{billion}\\ =\text{\$50}\text{billion}\end{array}$

Working note:

Calculation for multiplier:

  $\begin{array}{c}\text{m}=\frac{1}{1-\text{MPC}}\\ =\frac{1}{1-\frac{4}{5}}\\ =5\end{array}$

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

  $\text{MPC}=\frac{\text{ΔC}}{\text{ΔY}}$

Where $\Delta \text{C}$ represents change in consumption and $\Delta \text{Y}$ 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:

  $\text{AE}=\text{C}+\text{I}+\text{G}+\text{NX}$

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.

  $\text{Multiplier}=\frac{1}{1-\text{MPC}}$