None The graph shows an economy below full employment.To restore full employment, the government increases government expenditure by $0.5 trillion.Draw a curve to show the effect of the increase if it is the only change in spending plans. Labelthe curve AD+AE.The increase in government expenditure sets off a multiplier process. Draw a curve that showsthe multiplier effect that returns the economy to full employment. Label it AD₁.Draw a point at the full-employment equilibrium.130-120-Price level (GDP price index, 2012-100)110-105100-90-80-17.5Potential GOP1918.519.5ADO20.5QGAS21.5Real GDP (trillions of 2012 dollars)>>> Draw only the objects specified in the question.

The economy is at full employment level at where the potential GDP is equal to actual GDP. In the…

Answered: The graph shows an economy below full…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1TY

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Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.62 and the tax rate is 8%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much does…
The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike. 130 120 Aggregate Demand 110 100 90 Aggregate Demand 80 70 10 20 30 40 50 60 OUTPUT Suppose the governments of two different economies, economy J and economy K, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy J is 0.85 and the MPC in economy K is 0.8. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the PRICE LEVEL
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 the economy is______, and the spending multiplier for the economy is______. suppose the government in this economy decides to decrease the government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income generating an initial change in consumption equal to______. This decreases 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_____________. The following graph shows that 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 spending multiplier effect takes place. Hint: be sure that the new aggregate demand curve (AD2) is parallel…
What effect an increase of government spending will have on the output equilibrium in the goods market? Explain using autonomous spending. please explain
Q)Imagine the government wants to conduct an expansionary fiscal policy and needs an expert to answer the following questions before making a decision. a) Calculate the value of the multiplier effect if the marginal propensity to consume is 0.8. b) Calculate the increase in GDP which will occur, if the government increases its government spending by $600 million and the marginal propensity to consume is 0.8.
The multiplier effect of a change in government purchases Suppose there is some 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 (0.2 or 0.8 or 1 or 1.25 or 5), and the spending multiplier for this economy is (0.2 or 0.8 or 1 or 1.25 or 5). Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to (320 billion or 2000 billion or 1000 billion or 80 billion or 160 billion). This increases income yet again, leading to a second change in consumption equal to (160 billion or 80 billion or 1000 billion or 2000 billion or 256 billion). The total change in demand resulting from the initial change in government spending is (2 trillion or 0.8 trillion or 1.6 trillion or 3.2 trillion).
The multiplier effect of a change in government purchases 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 (0.25 or 0.75 or 1 or 1.33 or 4), and the spending multiplier for this economy is (0.25 or 0.75 or 1 or 1.33 or 4). 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 (-$1,000 billion or -$187.5 billion or -$93.8 billion or - $62.5 billion or -500 billion). This decreases income yet again, leading to a second change in consumption equal to (- $93.8 billion or - 1,000 billion or - $500 billion or - $140.6 billion or -62.5 billion). The total change in demand resulting from the initial change in government spending is (-$1 trillion or - $1.9…
Government expenditures represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect in the economy.
What is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75. $ What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed. $ An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real GDP. no change to real GDP. a larger eventual effect on real GDP. a smaller eventual effect on real GDP.
Initially, the economy is producing $13 trillion in goods and services and the government is spending $2 trillion.Then the government decides to increase its spending to $2.7 trillion. a) What is the value of the spending multiplier? b) Compute the new equilibrium level of output. Assume that the marginal propensity to consume is 0.7 (MPC=0.7).
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 $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion. The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity,…
Suppose there is some 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 Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to This increases 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 I The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. and the spending multiplier for this economy is 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." 140 Hint: Be sure that the new aggregate demand curve…

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