Bundle: Microeconomics, 13th + Aplia, 1 Term Printed Access Card
13th Edition
ISBN: 9781337742535
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 20, Problem 2QP
To determine
The difference between
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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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Bundle: Microeconomics, 13th + Aplia, 1 Term Printed Access Card
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