Injections include: O Consumer saving C) Business saving O Exports O Taxes It the marginal propensityr to consume is ELF, then the multiplier is: It the marginal propensity to consume is 0.9, 1what is the marginal propensity to save? O mo (3. so (3. 10 (3. 9 nae: Iii Suppose that investment demand increases by $300 billion in a closed and private economy [no government or foreign trade}. Assume further that households have a marginal propensity to consume of 75 percent. What will be the nal cumulative impact on spending? Enter your answer in billions. For example if your answer is $600 billion then enter 600. if your answer is $1, 500 then enter 1500. Use this information to answer questions 5-7 Figure 1 $600 500 AD 400 PRICE LEVEL [average price) 300 200 100 D $200 400 600 800 1.000 1.200 1,400 REAL GDP (dollars per year)What is the equilibrium rate of GDP? 900 O 1200 O 800 O 1000 1100 If full-employment real GDP is $1,200, what problem does this economy have? O recessionary gap O low unemployment O high inflation O inflationary gap 135 7 If the multiplier were equal to 4, how much additional investment would be needed to increase aggregate demand by the amount of the initial GDP gap? O 100 O 25 0 50 O 75Read the following to answer this question" THE ECONOMY TOMORROW MAINTAINING CONSUMER CONFIDENCE This chapter emphasized how a sudden change in investment might set off the multiplier process. Investors aren't the only potential culprits, however. A sudden change in govern- ment spending or exports could just as easily start the multiplier ball rolling. In fact, the whole process could originate with a change in consumer spending. Consumer Confidence. Recall the two components of consumption: autonomous con- sumption and induced consumption. These two components may be expressed as C=a+by We've seen that autonomous consumption (a in the equation) is influenced by nonincome factors, including consumer confidence. As we first observed in Chapter 8, changes in consumer confidence can therefore be an AD shift factor: a force that changes the value of autonomous consumption and thus shifts the AD curve to the right or left. A change in consumer confidence can change the marginal propensity to consume (b in the equation) as well, further shifting the AD curve. These AD shifts can be substantial. According to the World Bank, every 1 percent change in consumer confidence alters autonomous consumption by $1.1 billion. That makes the 2007-2008 plunge in consumer confidence particularly scary. As Figure 10.10 illustrates, consumer confidence declined by more than 40 percent from the beginning of 2007 to the end of 2008. That loss of confidence caused consumer spending to drop even further than the cutbacks induced by falling incomes. Ironically, when consumers try to cope with recession by cutting their spending and saving more of their incomes, they actually make matters worse (see In the News "The Paradox of Thrift"). This "paradox of thrift" recognizes that what might make sense for an individual consumer doesn't necessarily make sense for aggregate demand. The Official View: Always a Rosy Outlook. Because consumer spending vastly out- weighs any other component of aggregate demand, the threat of abrupt changes in con- sumer behavior is serious. Recognizing this, public officials strive to maintain consumer confidence in the economy tomorrow, even when such confidence might not be war- ranted. That's why President Hoover, bank officials, and major brokerage houses tried to assure the public in 1929 that the outlook was still rosy. (Look back at the first few pages of Chapter 8.) The "rosy outlook" is still the official perspective on the economy tomor- row. The White House is always upbeat about prospects for the economy. If it weren't-if it were even to hint at the possibility of a recession-consumer and investor confidence might wilt. Then the economy might quickly turn ugly. According to World Bank estimates, by how much did consumer spending decline as a result of the 40 percent drop in the index of consumer confidence between 2007 and 2009? Enter your answer in billions. For example, if your answer is $65 billion then enter 65D 135 9 If the consumption function is C = $149 billion + 0.8Y, what is the autonomous consumption (i. e., autonomous spending)? D 135 10 If the consumption function is C = $400 billion + 0.8Y, how much do households save? 80%% of their income O 20% of their income $320 billion of their income O they save no income