3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier for this economy is Suppose investment in this economy increases by $150 billion. The increase in investment will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income.

3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier for this economy is Suppose investment in this economy increases by $150 billion. The increase in investment will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 1.1P

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Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The multiplier for this economy is . Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $300 billion First Change in Consumption = billion Second Change in Consumption = billion • • • • • • Total Change in Income = billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes change by $300 billion, spending will change by billion. Based on…
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1. Suppose that the economy can be described by the following equations: C = 400 + (8/9)*DI I = 300G = 800T = (1/2)*Y (X – M) = 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept?b. Find the equilibrium level of output.c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending.ii) Calculate the new equilibrium level of income.iii) Calculate the change in income and compare to the increase in government spending. Comment.iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar.v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv).Now G assumes its original value of G = 800.d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of…
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