Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 23, Problem 5.1P
To determine
The multiplier process.
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Students have asked these similar questions
a. Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate
the new equilibrium level, Y', to verify this.
b. Now suppose investment increases to I = 100, just as, in problem 1(d). What is the new
equilibrium income?
Does this change in investment spending have more or less of an effect on Y than it did
in problem 1? Why?
Draw a diagram indicating the change in equilibrium income in this case.
с.
d.
3. Now we look at the role taxes play in determining equilibrium income. Suppose we have an
economy of the type in Sections 10-4 and 10-5, described by the following functions:
C = 50 +.8YD
I = 70
G = 200
TR = 100
1-0-0-20.
t = .20
a. Calculate the equilibrium level of income and the multiplier in this model.
b. Calculate also the budget surplus, BS.
c. Suppose that t increases to .25. What is the new equilibrium income? The new multiplier?
d. Calculate the change in the budget surplus. Would you expect the change in the surplus
to be more or less if c = .9…
What is the multiplier effect?
The multiplier is simply the ratio of the change in (r
spending. Multiplying the initial change in spending by the multiplier gives you the amount of
change in real GDP.
G
) to the initial change in
The multiplier effect can work in a positive or a negative direction. An initial increase in spending will
result in a (smaller, larger) increase in real GDP, and an initial decrease in spending will result in
a larger (increase, decrease ) in real GDP. The multiplier magnifies the fluctuations in economic
activity initiated by changes in investment spending, net exports, government spending, or
consumption spending.
The multiplier is related to the marginal propensities. The MPC is (directly, inversely ) related to the size
of the multiplier. The MPS is (directly, inversely ) related to the size of the multiplier.
What will multiplier and MPS be when the MPC is .9, and 0.5?
MPC
MPS
Multiplier
.9
.5
How much of a change in GDP will result if firms increase…
1) Determine the value of the multiplier for this economy, and find the equilibrium value of Y.
Chapter 23 Solutions
Principles of Economics (12th Edition)
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