MindTap Economics, 1 Term (6 Months) Printed Access Card for Mceachern's ECON MACRO, 6th
6th Edition
ISBN: 9781337915595
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 9, Problem 12P
To determine
Size of the multiplier if investment increases as real GDP increases.
Introduction: An investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy. The multiplier attempts to quantify the additional effects of a policy beyond those immediately measurable. The larger an investment's multiplier, the more efficient it is at creating and distributing wealth throughout an economy.
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The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
What is the equilibrium level of GDP?
What is the multiplier?
Which of the following statements best describes the multiplier effect in economics?
A. The process of reducing government spending to stimulate economic growth.
B. An increase in consumer saving when government expenditure decreases.
c. A phenomenon where an initial increase in spending leads to a more significant overall increase in
economic output.
D. The concept of a fixed relationship between inflation and unemployment rates.
Consider an economy that is described by the following:
Autonomous consumption = 100
Autonomous investment = 100
Marginal propensity to consume = 0.75
a. What is the consumption function of this economy?
b. Derive the equilibrium income of this economy?
c. How large is the change in the equilibrium income if investment rises to 200?
Chapter 9 Solutions
MindTap Economics, 1 Term (6 Months) Printed Access Card for Mceachern's ECON MACRO, 6th
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- There might be many factors (economic and non-economic) that affect the size of the multiplier. What are some that you think could influence its size? Which ones do you think would make it larger, and which are more likely to make it smaller?arrow_forwardConsider an economy described by the following:Autonomous consumption ( a ) = 100Autonomous Investment = 100Marginal propensity to consume = 0.75 2. What is the consumption function for this economy?arrow_forwardWhich best describes why the multiplier existarrow_forward
- Suppose the United States economy is represented by the following equations: Z = C + I + G C = 500 + .5YD T = 600 I = 300 YD = Y - T G = 2000 Given the above variables, calculate the equilibrium level of output. Now, assume that government spending decreases from 2000 to 1900. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?arrow_forwardVery briefly summarize the relationships shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment demand curve, and (d) the multiplier effect. Which of these relationships are direct (positive) relationships and which are inverse (negative) relationships? Why are consumption and saving in the United States greater today than they were a decade ago?arrow_forwardThe equilibrium position for an economy is represented by the following equations: Y = C + I, + G %3D C = a + b(Y – T) T = tY Let a = 25, b = 0.8 and t = (0.3. %3D Determine the value of the multiplier for this economy. Show your working.arrow_forward
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