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 decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to ▼. This decreases 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 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 (AD₂) 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 (AD₁). You can see the slope of AD₁ by selecting it on the graph.

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 decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to ▼. This decreases 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 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 (AD₂) 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 (AD₁). You can see the slope of AD₁ by selecting it on the graph.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter19: The Keynesian Model In Action

Section: Chapter Questions

Problem 7SQP

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