MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 8, Problem 8DQ
To determine
To describe: The reason for divide do not give a good estimate of the marginal propensity to consume between 2008 and 2009.
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Consider an economy described by the following equations:
Y = C+I+G
C = 100+0.75 (Y-T)
I = 500-50r
G = 125
T = 100
where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000.
Explain the meaning of each of these equations.
What is the marginal propensity to consume in this economy?
Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?
Assuming no change in monetary policy, what change in government purchases would restore full employment?
Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
Suppose disposable income increases by $2,000$2,000. As a result, consumption increases by $1,500$1,500. Answer the questions based on this information. Where appropriate, enter your answer as a decimal rather than as a percentage.
The increase in savings resulting directly from this change in income is
$$
The marginal propensity to save (MPS) is
The marginal propensity to consume (MPC) is
The marginal propensity to save is defined as the 1-MPC, where MPC is marginal propensity to consume. Then marginal propensity to save can be of any positive value. Discuss the argument stated above.
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- In a closed economy without exports and imports, the marginal propensity to save increases and tax rates remain unchanged. What effect will this have on the marginal propensity to consume and on the multiplier?arrow_forwardIn 250 words or less, answer the following question. With reference to the multiplier process, discuss how a shock to an exogenous component of aggregate expenditure may lead to a larger than proportionate change in economic output in equilibrium.arrow_forwardWhich of the following would be most likely to increase consumption spending? Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer. a A reduction in consumer credit card debt b A drop in stock prices c A higher interest rate d The expectation of lower future pricesarrow_forward
- Which of the following correctly describes how a decrease in the price level affects consumption spending? Select one: a. A decrease in the price level raises real wealth, which causes consumption to increase. b. A decrease in the price level decreases the amount of money a household needs to buy goods and so raises the interest rate, which causes consumption to increase. c. A decrease in the price level increases the amount of money a household needs to buy goods and so raises the interest rate, which causes consumption to increase. d. A decrease in the price level lowers real wealth, which causes consumption to decrease.arrow_forwardThe Canadian Government decides to inject $10,000,000 into the economy by increasing its spending on infrastructure. If the Marginal Propensity to Consume is .6 or 60% what will be the overall change in GDP/Real Output?arrow_forwardDue to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?arrow_forward
- Based on the above graph, which of the following is wrong? Select one: a. Saving is inversely (negatively) related to disposable income. b. The marginal propensity to consume is constant at all levels of income and it is equal to the slope of the consumption schedule. c. The marginal propensity to save rises as disposable income rises. d. When consumption equals disposable income saving must be zero.arrow_forwardIn 2009, the US Federal government cut taxes by approximately $300 billion, increased government spending by approximately $300 billion, and increased transfer payments by approximately $200 billion. Answer the following questions, assuming the marginal propensity to consume was 0.75. What was the maximum change in GDP from the government spending? Show your work.arrow_forwardAn economy is currently in equilibrium. The following figures refer to elements in its national income accounts. A) If national income now rises by £12 billion, and as a result, the consumption of domestically produced goods rises to £68 billion. Calculate the marginal propensity to consume (MPC). B) What is the value of the multiplier? C) Comment on the results in part (a) and (b).arrow_forward
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