Consider a 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 is, and the spending multiplier for this economy is. Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases 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
Consider a 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 is, and the spending multiplier for this economy is. Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases 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
Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 6.13P
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CENGAGE MINDTAP
Homework (Ch 15)
Consider a 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 is, and the spending multiplier for this economy is
Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead
to an increase in income, generating an initial change in consumption equal to
This increases 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.
PRICE LEVEL (CPI)
140
135
130
125
120
115
110
AD₁
AD2
(?)
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