Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 $250 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. 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 $250 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter18: Debates In Macroeconomics Over The Role And Effects Of Government
Section: Chapter Questions
Problem 3QP
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Transcribed Image Text:Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining
$0.25.
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 $250 billion. The increase in government spending will lead
to an increase in income, creating an initial change in consumption equal to
This increases income yet again, leading to a
second change in consumption equal to
The total change in demand resulting from the initial change in government spending is
Transcribed Image Text: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 (AD) after the multiplier effect takes place. For simplicity, assume that
there is no "crowding out."
Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD). You can see the slope of AD, by
selecting it on the graph.
PRICE LEVEL
140
135
130
120
115
110
105
100
AD₁
2
OUTPUT (Trillions of dollars)
¢
AD₂
?
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