Hi Course Hero,

I am having a trouble trying to solve the problem below. I have provided the possible answers and also indicated a question that requires a fill in the blank. Thank you.

1. The multiplier effect Consider a hypothetical economy where there are no taxes and no international trade. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. If there are no taxes and no international trade, the oversimplified multiplier for this economy is ill In the missing blank pleas Suppose investment spending in this economy decreases by $150 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 Now consider a more realistic case. Specifically, assume that the government in our hypothetical economy collects income taxes. In this case, the arger than multiplier will be_ the oversimplified multiplier you found earlier. smaller than Suppose that the price level in our economy remains the same and that there is still no international trade. Now, however, the government decides to he same as implement an income tax of 5% on each dollar of income. The MPC and MPS, however, remain the same as before. In this case, after accounting for the impact of taxes, the multiplier in this economy is , and a $150 billion decrease in invest ent spending will lead to a billion in output. 1.0309 2.5 -$375 decrease 1.0526 $348.84 increase 2.3256 -$154.64 -$157.89