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…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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.
In Utopia (a country with substantial excess resources), consumers spend 70% of their incomes and save 30%; the country spends 30% of GDP on imports and the government typically takes 10% of household incomes in taxation.a) What is the value of the multiplier?Last year, the Utopian Government spent 5Bn Utopian Dollars on current expenditure; Utopian households spent 0.5Bn Utopian Dollars in “autonomous consumption” and Utopian enterprises sold goods and services worth 10 Bn Utopian dollars to other countries. Utopian investors spent 15Bn Utopian dollars in maintaining and enhancing the country’s capital equipment.b) What was the value of GDP last year?c) What was the value of the Utopian Government’s budget surplus or deficit last year?d) How would the value of the multiplier (in 2(a) change if Utopia was a closed economy (so zero imports)?e) If the Utopian economy were already at its potential GDP (ie its full -employment GDP), what would happen to the value of the multiplier?
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?
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. INTEREST RATE 15.0 12.5 10.0 7.5 5.0 2.5 0 0 15 Money Supply known as the Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply image 2 Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by ▼at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is ▼ effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the…
The multiplier (expenditure multiplier) is the ratio between which two measures? marginal propensity to consume AND the size of an autonomous change in nominal GDP marginal propensity to save AND marginal propensity to consume total change in nominal GDP caused by an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending O total change in real GDP due to an autonomous change in aggregate spending AND the size of the autonomous change in aggregate spending
Use the graph to illustrate the effects of a $10 billion increase in government spending. Assume that the economy is initially producing at full employment, and the spending multiplier (m³) is 10. 165 LRAS 160 155 150 145 140 135 130 125 AD 120 115 50 100 150 200 250 300 350 400 450 500 Real GDP How much of each additional dollar of income is devoted to consumption? MPC = $ Price level (P)
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14. If MPC is 0.6 and government spending increases by 350, how much does gross domestic product change? 15. If MPC is 0.6 and government tax decreases by 350, how much does gross domestic product change? (NOTE: Refer to the textbook) 16. From #14 and #15, can you tell which policy tool does have a higher multiplier effect?

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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?