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- With the economy in a recession due to inadequate aggregate demand, the government increased its spending by $1,200. Suppose the central bank takes no action for the time being, and the marginal propensity to consume is 2/3, how large will the increase of aggregate demand approximately?Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800. Calculate the equilibrium r and Y. Calculate the government spending multiplier.Which one of the following statements relating to marginal propensity to consume is INCORRECT? (a) Marginal propensity to consume for a given consumption function is usually less than 1; (b) If the people in a country save 30c out of every rand they earn, the marginal propensity to consume in this country is said to be 0.7; (c) If the marginal propensity to consume is given as 0.622, then the value of the simple multiplier will be 2.5; (d) The larger the value of the marginal propensity to consume, the steeper the consumption function will be.
- Suppose that out of the original 100 of government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what will the value of the total aggregate expenditures be after the fourth round in the cycle is completed?The government spending multiplier is: A) Always bigger than the investment multiplier B) Always less than the investment multiplier C) Exactly the same as the investment multiplier D) The reciprocal of the marginal propensity to consumeSuppose the marginal propensity to consume equals 0.8 (i.e., c1 = 0.8). Given this information, which of the following events will cause the largest increase in output? Select one or more: a. Public spending, G, increases by 200 b. real GDP was larger than nominal GDP from 2002 to 2008 Public spending, G, increases by 150 c. Investment, I, increases by 150 d. Taxes, T, decrease by 200
- State whether it is true or not When the marginal propensity to consume is 0 the value of investment multiplier will also be 0What is the relationship between the marginal and average propensity to consume in the standard Keynesian consumption function and permanent income hypothesis? What are the assumptions required to in order to derive the accelerator investment function? Why does investment take place according to this model?If the marginal propensity to consume is equal to 0.8, and the government injects $50,000,000 of spending into the economy, then the shift of the AD curve BEFORE crowding-out would be:
- Compare the ultimate effects of an increase in interest rates in an economy with a low marginal propensity to consume with those in an economy that has a larger marginal propensity to consume? ExplainWhat is the relationship between the marginal and average propensity to consume in the standard Keynesian consumption function and permanent income hypothesis?If the marginal propensity to consume of an economy is 0.7, then the simple spending multiplier is: