Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. 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 increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
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- 3. Complete the following chart to calculate the spending and tax multipliers. Spending Multiplier Таx MPC MPS Multiplier 0.05 0.9 0.2 0.75 0.6 0.5 1The marginal propensity to consume (MPC) for this econamy is . and the spending multiplier for this economy is Suppose the govemment in this economy decides to decrease govemment purchases by $250 bilion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to second change in consumption equal to This decreases income yet again, causing a The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD ) for this economy before the change in govemment spending. Use the green line (trangie symbol) to plot the new aggregate demand curve (AD:) after the multiplier effect takes place. For simplioity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD) is paralel to the initial aggregate demand curve (AD). You can see the slope of AD by selecting t on the graph. 540 AD. AD, 130 100 OUTPUT (Tions of…stlon 16 Troll Island is a small island nation that recently experienced an autonomous change in aggregate expenditures (AE). AE increased by 2 billion, and the marginal propensity to consume on Troll Island is equal to 0.6. What is the change in Troll Island's real GDP after the increase in AE? Enter your answer in billions of dollars, rounded to one place after the decimal. For example, an answer of $2,500,000 should be entered as 2.5. %24 billion
- 6 If the marginal propensity to consume (MPC) is 0.40, the expenditure multiplier will be equal to _______ . (Enter your answer using ONE decimal place)O Macmillan Learning The graph shows the income-expenditure model for the country of Desireland, where AE represents aggregate expenditure. The Desirish government wants to stimulate the economy owing to a slowdown in economic activity and, as such, decides to increase infrastructure spending by $7.65 billion. Show the impact of this extra spending given a marginal propensity to consume (MPC) of 0.7 and a total tax take of 30%, for any changes in GDP. In this example, assume that there is no international trade or inflation, and that interest rates are fixed. Planned aggregate spending (in billions of dollars) 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 0 01- 5 10 15 20 25 30 35 40 45 50 Real GDP (in billions of dollars) 45 degree line A new socialist government is elected to Desireland and decides to increase direct spending even more, to total of $9.7 billion. What will be the total change in real GDP? Please provide the answer to the nearest whole billion. Planned AE 55 60 65 70…The formula for the government spending multiplier is A) 1/(1+ MPC). B) 1/MPS. O C) 1/MPC. O
- 3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The spending multiplier for this economy is Suppose investment in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment == -$200 billion First Change in Consumption Second Change in Consumption Total Change in Spending - - $ $ billion billion billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be spending will change by S billion. thus, if taxes decrease by $-100 billion thenQuestion 12 The key explanation for the multiplier effect lies in: O Households are assumed to spend on consumption only part of any additional income they receive. O Households are assumed to invest only part of their savings when their incomes rise. Investment expenditures increase as national income increases. O None of the above.1. Explain briefly how spending can multiply, and then calculate the spending multiplier when the MPC isa. 0.75 b. 0.8 c. 0.6
- Chapter 14 Explain the basic idea of the expenditure multiplier and the role consumers play.Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax. 6 on4m21 3 Tax Revenue B Tax Size Refer to Figure 8-23. If the economy is at point A on the curve, then a small increase in the tax rate will O increase the deadweight loss of the tax and increase tax revenue. O increase the deadweight loss of the tax and decrease tax revenue. decrease the deadweight loss of the tax and increase tax revenue. O decrease the deadweight loss of the tax and decrease tax revenue.7. The multiplier and the MPC Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100o, 100). The second economy's MPC is 0.75. Therefore, its initial planned expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in planned investment in each economy. Place a green line (triangle symbol) on each of the preceding graphs to indicate the new planned expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium…