ECO 2302 PRIN MACO W/MYECO ACC >IP<
4th Edition
ISBN: 9781323504161
Author: CASE
Publisher: PEARSON C
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Question
Chapter 8, Problem 5.1P
To determine
The multiplier process.
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Explain the multiplier intuitively. Why is it that an increase inplanned investment of $100 raises equilibrium output by morethan $100? Why is the effect on equilibrium output finite? Howdo we know that the multiplier is 1/MPS?
An economy has a marginal propensity to consume of 0.5, and Y*, the income-expenditure equilibrium GDP, equals $500 billion. Given an autonomous increase in planned investment of $10 billion, answer the following questions.
a. What is the value of the multiplier?
Value of the multiplier =
b. What would you expect the total change in Y* to be based on the multiplier formula?
Change in Y* based on the multiplier =
billion
c. What is the total change in real GDP after the 10 rounds?
It may be beneficial to make a table on a separate sheet of paper to calculate the change in real GDP for each of the rounds, and then add up the values.
Total change in real GDP (10 rounds) =
If the multiplier coefficient is 5, by what amount does real GDP output have to increase or decrease in order to restore equilibrium if investment spending increases by $4 billion?
A)
10 billion decrease.
B)
9 billion increase.
C)
20 billion increase.
D)
1 billion decrease.
Chapter 8 Solutions
ECO 2302 PRIN MACO W/MYECO ACC >IP<
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- Assume the marginal propensity to consume is 0.8. If consumer spending rises by $20 billion, then total income through the multiplier effect will: Increase by $100 billion Decrease by $100 billion Increase by $10 billion Will not change How do I calculate this?arrow_forwardHow is it possible for investment spending to increase even in a period in which the real interest rate rises? Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?arrow_forwardRefer the table below and answer the questions that follow. Aggregate Output ($ million) Y Aggregate Consumption ($ million) C Aggregate Saving ($ million) S Planned Investment ($ million) I Aggregate Expenditure AE = C+I 2,000 1,500 700 2,400 1,800 700 2,800 2,100 700 3,200 2,400 700 3,600 2,700 700 Fill in the table and find the equilibrium income. Find the MPC, MPS and the multiplier. If the planned investment increases by $100 million find the new equilibrium level of income.arrow_forward
- If planned investment spending increases by $6 million, and consumers are likely to spend 80¢ for every dollar of disposable income they earn, how much will equilibrium output increase by a. $30 million b. $7.5 million c. $6 million d. $5 million e. $4.8 millionarrow_forwardWhat is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0, .4, .6, and 1? What will it be when the MPC is 1, .90, .67, .50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is .80? If the MPC is .67?arrow_forwardSuppose the MPC is .6 and consumption increases by $8 billion. Consequently, total income through the multiplier effect will: $8 billion $13.3 billion $15 billion $20 billion How do I calculate this?arrow_forward
- If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then O A. the multiplier is 0.125. B. the multiplier is 3.5. C. the multiplier is 8. D. the multiplier is 50.arrow_forwardIf national income now rises by £22 billion and as a result, the consumption of domestically produced goods rises to £80 billion. Calculate the marginal propensity to consume (MPC)What is the value of the multiplier? What is the value of the multiplier? Comment on the results in part (3) and (4).arrow_forwardConsider an economy in which autonomous consumption, planned autonomous investment, autonomous government expenditure, autonomous taxes, and the marginal propensity to consume are given (there are no net exports). Autonomous consumer spending = $3,000 Ip = $5,000 G = $3,000 T = $4,000 MPC = .75 What is the value of the multiplier?arrow_forward
- Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process. what is the MPC? What is the size of the Multiplier? If, instead, GDP and consumption both rose by $8 billion in the second round, what would have been the size of the multiplier?arrow_forwardThe value of the multiplier is necessarily increased if a. the marginal propensity to consume increases and the marginal propensity to import falls. b. the marginal propensity to consume falls and the tax rate falls. c. the marginal propensity to consume and the marginal propensity to import rise. d. the income tax rate falls and the marginal propensity to import rise.arrow_forwardIf the marginal propensity to consume (MPC) is .75 for a closed economy, what is the multiplier coefficient? A) not enough information. B) 4 C) 3 D) 5arrow_forward
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