Subpart (a):
Multiplier, MPC and change in GDP.
Subpart (a):
Explanation of Solution
Multiplier can be calculated as follows:
Multiplier is 2.5. If the MPS is 0.4, the multiplier will be 2.5.
If the MPS is 0.6 then the multiplier can be calculated as follows:
If MPS is 0.6, the multiplier will be 1.667. If the MPS is 1 then the multiplier will be infinity or undefined.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (
Subpart (b):
Multiplier, MPC and change in GDP.
Subpart (b):
Explanation of Solution
If MPC is 1, then the multiplier will be infinity or undefined. If MPC is 0.90, then the multiplier can be calculated as follows:
Hence, when MPC is 0.90, then the multiplier will be 10.
If MPC is 0.67, then multiplier can be calculated as follows:
Hence, when MPC is 0.67, then the multiplier will be 3.
If the MPC is 0.50, then the multiplier can be calculated as follows:
Hence, when MPC is 0.50 the multiplier will be 2.
If MPC is 0, then the multiplier can be calculated as follows:
Hence when MPC is 1, then the multiplier will be 1.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (c):
Multiplier, MPC and change in GDP.
Subpart (c):
Explanation of Solution
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $40 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (d):
Multiplier, MPC and change in GDP.
Subpart (d):
Explanation of Solution
In case, if 0.67 is MPC, the change in GDP will be equal to $24 billion. In this case, the multiplier will be 3.
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $24.24 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
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Chapter 30 Solutions
ECO 2020 INCLUSIVE ACCESS
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- CF 1 2 3 4. 5 Disposable income (trillions of 2005 dollars) In the above figure, at a disposable income level of $2 trillion, saving equals Select one: O a. $4 trillion. O b. zero. O c. consumption expenditures. O d. disposable income. 6. 3 DT Processing of...pdf 2 Introduction to..pdf odf here to search Consumption expenditure (trillions of 2005 dollars) 5, IIarrow_forwardLAST WORD What is Say's law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve? Use production possibilities analysis to demonstrate Keynes's view on this matter.arrow_forwardSuppose disposable income increases from $7 trillion to $8 trillion. At the same time, consumption expenditure increases from $6.8 trillion to MPC must equal Thus the O $7.8 trillion; 0.60 O $7.6 trillion; 0.80 O $7.4 trillion; 0.40 O $8 trillion; 1.00arrow_forward
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- 2. L Give Up! Suppose the Japanese economy has been experiencing slow growth. As a result, the Prime Minister, who thinks John Maynard Keynes was the greatest economist ever, has decided to increase government spending. The Prime Minister asks the head of the economic council to determine the increase in government spending necessary to bring the economy to full employment. Assume there is a GDP gap of 1 trillion yen and the marginal propensity to consume (MPC) is 0.60. What advice should the head of the economic council give the Prime Minister? O The recessionary gap is equal to 400 billion yen. O The inflationary gap is equal to 400 billion yen. O The recessionary gap is equal to 625 billion yen. O The inflationary gap is equal to 625 billion yen.arrow_forwardSuppose an economy has no imports (MPI, m = 0). The MPC (c) is 0.75 and real GDP is $120 billion. Businesses increase investment by $4 billion. The multiplier is in real GDP from the increase in investment is and the change billion. O a. 5; $16 O b. 4; $25 O C. 5; $25 O d. 4; $16 e. 0.75; $3arrow_forwardGiven that marginal propensity to save (MPS) is 0.5, what is the multiplier? O 2 O 4 0.5arrow_forward
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