Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Attempts Keep the Highest / 3 6. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which

image text in transcribed
image text in transcribed
Attempts Keep the Highest / 3 6. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.85 of each additional dollar they earn and save the remaining $0.15 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 $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to V . 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 (AD,) 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 (AD)2) is parallel to the initial aggregate demand curve (AD1). You can see the slope of AD, by selecting it on the graph. (? 140 AD 135 AD 2 130 125 20 PRICE LEVEL 115 110 105 00 3 5 6 OUTPUT (Trillions of dollars)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Understanding Business

Authors: William NickelsJames McHughSusan McHugh

12th Edition

1259929434, 9781259929434

More Books

Students also viewed these Economics questions

Question

please dont use chat gpt AI 4 0 . - / grouppost

Answered: 1 week ago