investment

ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter9: Aggregate Demand
Section: Chapter Questions
Problem 1.1P
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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
Transcribed Image Text: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
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