PRICE LEVEL (CPI) The marginal propensity to consume (MPC) for this economy is_ ,, and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, causing a second change in consumption equal to _. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph. 140 135 35 130 125 120 115 110 105 AD 2 AD1 100 0 1 2 3 4 5 6 7 8 A ?
PRICE LEVEL (CPI) The marginal propensity to consume (MPC) for this economy is_ ,, and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, causing a second change in consumption equal to _. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it on the graph. 140 135 35 130 125 120 115 110 105 AD 2 AD1 100 0 1 2 3 4 5 6 7 8 A ?
Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 6.13P
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Transcribed Image Text:second change in consumption equal to
The total change in demand resulting from the initial change in government spending is
The following graph shows the aggregate demand curve (AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place.
Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD1). You can see the slope of AD1 by
selecting it on the graph.
PRICE LEVEL (CPI)
140
135
AD
130
125
120
115
110
105
100
0
1
2
3
4
5
6
7
8
REAL GDP (Trillions of dollars)
AD2
?
Transcribed Image Text:Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25.
The marginal propensity to consume (MPC) for this economy is
and the spending multiplier for this economy is
Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will
lead to a decrease in income, generating an initial change in consumption equal to
This decreases income yet again, causing a
second change in consumption equal to
.
The total change in demand resulting from the initial change in government spending is
The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place.
Hint: Be sure that the new aggregate demand curve (AD 2) is parallel to the initial aggregate demand curve (AD1). You can see the slope of AD1 by
selecting it on the graph.
PRICE LEVEL (CPI)
140
AD
1
135
130
125
120
115
110
105
100
0
1
2
3
4
5
6
7
8
AD 2
(?)
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