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?

Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $3.75 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. 116 -A 114 AD2 112 110 PRICE LEVEL 108 106 104 102 100 AD1 100 105 110 115 120 125 130 135 AD 3

Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD1). Suppose the government increases its purchases by $2 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD1. You can see the slope of AD1 by selecting it on the following graph. 114 152 110 100 100 104 102 150 100 102 104 108 108 110 112 114 110 OUTPUT( 30 41 The following graph shows the money market in equilibrium at an interest rate of 1.5% and a quantity of money equal to $45 billion. SINNTEKIN Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. as 0 D 15 Money 30 MONEY Mordy Domene 45 00 of d A AD₂ 75 Ⓒ a Money Damen Many Sy (?)…

Suppose that there is an autonomous increase in investment spending of $20 billion and the MPC is given as 0.4, and assuming taxes, imports, and savings are all equal and there are no leakages:  How large is the spending multiplier? Use the simple multiplier equation to calculate it. How much is the total change in GDP from this autonomous increase in investment spending? Do you think a larger or smaller MPC would help the economy, and why? What could be some concerns about the Keynesian spending multiplier?