22. Suppose economists observe that an increase in government spending of $10 billion raisesthe total demand for goods and services by $50 billion. What is the multiplier effect in this case?

Solution - Given - Government spending =$10 billion Demand for Goods and service = $50 billion We…

Answered: 22. Suppose economists observe that an…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 5.10P

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6. The multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The multiplier for this economy is Suppose government purchases, G, in this economy increase by $250 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $250 billion First Change in Consumption = $ billion Second Change in Consumption 24 billion Total Change in Income = billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes change by $250 billion, spending will change by $ billion. Based on your results, this Keynesian model predicts that a change…
5. The multiplier effect of a change in government purchases
6. Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?
3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The spending multiplier for this economy is Suppose investment in this economy decreases by $200 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. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment == -$200 billion First Change in Consumption Second Change in Consumption Total Change in Spending - - $ $ billion billion billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be spending will change by S billion. thus, if taxes decrease by $-100 billion then
4. Given this diagram; what is the equilibrium level of income? 5. Given this diagram; what is the level of "autonomous spending"? 6. Given this diagram, what is the simple income multiplier?
4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?
Question 12 The key explanation for the multiplier effect lies in: O Households are assumed to spend on consumption only part of any additional income they receive. O Households are assumed to invest only part of their savings when their incomes rise. Investment expenditures increase as national income increases. O None of the above.
TRUE - OR - FALSE Government purchases and income taxes will have the same effect on the multiplier. O True O False
The following graph shows the 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 multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve ( AD1 ). You can see the slope of AD1 by selecting it on the graph. 140 AD, 135 AD, 130 125 120 115 110 105 100 3 4 OUTPUT (Trillions of dollars) PRICE LEVEL
True or False? Explain: The multiplier effect is likely to be greatest when the government spending is targeted at the poorest The poor will always spend most of the money they get as benefits as soon as possible Multiplier effect does not depend on who receives the money The richest people will spend a larger proportion of their money than the poorest
2. If a $440 billion initial increase in spending leads to a S8050 billion change in real GDP, how big is the multiplier?
4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. 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 increase government purchases by $400 billion. The increase In government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases 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 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."…

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22. Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $50 billion. What is the multiplier effect in this case?