1. Explain briefly how spending can multiply, and then calculate the spending multiplier when the MPC is a. 0.75 b. 0.8 c. 0.6

2. The economy is experiencing a contraction (recessionary gap) of $400 billion. What government spending stimulus would you recommend to move the economy back to full employment if the MPC is 0.75? Would your policy be any different if the MPC were 0.66?

3. If the consumption function is C= $200 billion + 0.9Y, a) How much do consumers spend with income of $3 trillion? b) How much do they save?

4. Suppose that investment demand increases by $100. Assume that households have a marginal propensity to consume of 80 percent. Compute the first three rounds of multiplier effects as follows: 

a) What are the first cycle changes in spending? Total cumulative change equals? 

b) What are the second cycle changes in spending? Total cumulative change equals? 

c) What are the third cycle changes in spending? Total cumulative change equals? 

5. If Korean exports to the U.S. decline by $15 billion, by how much will total Korean spending drop if their MPC is 0.60? 

 

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1 Explain briefly how spending can multiply and then calculate the spending multiplier when the MPC is a 075 b 08 c 06 The spending multiplier effect ... View the full answer