Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and aggregate expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial aggregate expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) AGGREGATE EXPENDITURE (Bilions of dollars) AGGREGATE EXPENDITURE (Bilions of dollars) 200 180 160 120 100 80 60 140 120 100 20 0 0 A Line A A Life 40 MPC-0.5 45-Degree Line 80 100 120 REAL GDP (Bilions of dollars) MPC 0.75 160 180 45-Degree Line 100 REAL GDP (Bilions of dollars) 160 200 New AE Line New Equilibrium New AE Line New Equilibrium ? ?
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and aggregate expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial aggregate expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph by selecting it.) AGGREGATE EXPENDITURE (Bilions of dollars) AGGREGATE EXPENDITURE (Bilions of dollars) 200 180 160 120 100 80 60 140 120 100 20 0 0 A Line A A Life 40 MPC-0.5 45-Degree Line 80 100 120 REAL GDP (Bilions of dollars) MPC 0.75 160 180 45-Degree Line 100 REAL GDP (Bilions of dollars) 160 200 New AE Line New Equilibrium New AE Line New Equilibrium ? ?
Chapter9: The Keynesian Model In Action
Section: Chapter Questions
Problem 18SQ
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