Consider a hypothetical economy where there are no taxes and no international trade. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. If there are no taxes and no international trade, the oversimplified multiplier for this economy is 2.5. I need help with the part in bold. Suppose investment spending in this economy increases by $250 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 spending on the first two rounds of consumption spending and, eventually, on total output and income. Now consider a more realistic case. Specifically, assume that the government in our hypothetical economy collects income taxes. In this case, the multiplier will be (options: the same as, smaller than, larger than) the oversimplified multiplier you found earlier. Suppose that the price level in our economy remains the same and that there is still no international trade. Now, however, the government decides to implement an income tax of 5% on each dollar of income. The MPC and MPS, however, remain the same as before. In this case, after accounting for the impact of taxes, the multiplier in this economy is (1.0526, 2.3256, 2.5, 1.0309) , and a $250 billion increase in investment spending will lead to a _ ($581.4, $257.73, $625, $263.16) billion ___ (decrease, increase) in output

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 where there are no taxes and no international trade. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. If there are no taxes and no international trade, the oversimplified multiplier for this economy is 2.5.

I need help with the part in bold.

Suppose investment spending in this economy increases by $250 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 spending on the first two rounds of consumption spending and, eventually, on total output and income.

Now consider a more realistic case. Specifically, assume that the government in our hypothetical economy collects income taxes. In this case, the multiplier will be ______ (options: the same as, smaller than, larger than) the oversimplified multiplier you found earlier.

Suppose that the price level in our economy remains the same and that there is still no international trade. Now, however, the government decides to implement an income tax of 5% on each dollar of income. The MPC and MPS, however, remain the same as before. In this case, after accounting for the impact of taxes, the multiplier in this economy is __________(1.0526, 2.3256, 2.5, 1.0309) , and a $250 billion increase in investment spending will lead to a _________ ($581.4, $257.73, $625, $263.16) billion _______ (decrease, increase) in output.

Fill in the following table to show the impact of the change in investment spending on the first two rounds of consumption spending and, eventually, on
total output and income.
Change in Investment Spending
$250 billion
First Change in Consumption
$
billion
Second Change in Consumption
billion
Total Change in Output
2$
billion

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