MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Question
Chapter 9, Problem 7SQP
(a)
To determine
Calculate the spending multiplier.
(b)
To determine
Impact on aggregate spending.
Expert Solution & Answer
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Students have asked these similar questions
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…
Suppose there is some hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the $0.25 they have left
Tover. The following graph plots the economy's initial aggregate demand curve (AD)).
Suppose now that 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 (AD) after the multiplier effect takes place.
Hint: Be sure the new aggregate demand curve (AD) is parallel to AD). You can see the slope of AD, by selecting it on the following graph.
PRICE LEVEL
116
114
112
110
104
106
104
102
100
AD,
100
105
110 115 120 125
OUTPUT (Bilions of dollars)
130
135 140
AD₂
AD₂,
image 1
Problem 2
The Italian economy can be characterized by the following:
TE
45
TE
750
$ 5,000
Chapter 9 Solutions
MACROECONOMICS FOR TODAY
Ch. 9.4 - Prob. 1YTECh. 9 - Prob. 1SQPCh. 9 - Prob. 2SQPCh. 9 - Prob. 3SQPCh. 9 - Prob. 4SQPCh. 9 - Prob. 5SQPCh. 9 - Prob. 6SQPCh. 9 - Prob. 7SQPCh. 9 - Prob. 8SQPCh. 9 - Prob. 9SQP
Ch. 9 - Prob. 10SQPCh. 9 - Prob. 1SQCh. 9 - Prob. 2SQCh. 9 - Prob. 3SQCh. 9 - Prob. 4SQCh. 9 - Prob. 5SQCh. 9 - Prob. 6SQCh. 9 - Prob. 7SQCh. 9 - Prob. 8SQCh. 9 - Prob. 9SQCh. 9 - Prob. 10SQCh. 9 - Prob. 11SQCh. 9 - Prob. 12SQCh. 9 - Prob. 13SQCh. 9 - Prob. 14SQCh. 9 - Prob. 15SQCh. 9 - Prob. 16SQCh. 9 - Prob. 17SQCh. 9 - Prob. 18SQCh. 9 - Prob. 19SQCh. 9 - Prob. 20SQ
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- Using the table below to answer the following questions. Assume all values represent trillions of dollars. Construct a graph of the Aggregate planned expenditure What is the equilibrium expenditure? Explain what happens at a real GDP of $4 trillion dollars. (Note the aggregate expenditures and the effects on inventories) What are your total autonomous expenditures? What is the marginal propensity to consume? Ignoring imports and income taxes, what is the multiplier? If investment increases by $1.5 trillion, what is the change in real GDP?arrow_forwardConsider 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 AD₂. You can see the slope of AD, by selecting it on the following graph. ? PRICE LEVEL 110 114 112 110 100 100 104 102 100 AD 100 105 110 115 120 125 130 OUTPUT (Billions of dollars) 135 140 19 AD₂ AD₁ The following graph shows the money market in equilibrium at an interest rate of 7.5% and a quantity of money equal to $60 billion.arrow_forwardSuppose 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?arrow_forward
- 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 (AD1AD1). 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 (AD2AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2AD2) is parallel to AD1AD1. You can see the slope of AD1AD1 by selecting it on the following graph.arrow_forwardAn economy is characterized by the following desired consumption and investment functions: C = 543 + 0.72Y and I = 752. Part (a): Calculate the equilibrium level of GDP and the multiplier for this economy. Round your answer for the multiplier to 3 decimal places. Example: 0.001 Part (b): Suppose the level of desired investment changed to I = 731, with no change to desired consumption. What is the new equilibrium GDP level for the economy? Part (c): Using 1 to 2 sentences, describe how this change to desired investment affects the AE function graphically. Part (d): Suppose the desired investment levels returns to I = 752, but now consumers spend 86 cents of every dollar earned. What is the new equilibrium GDP level for the economy? Part (e): Using 1 to 2 sentences, describe how this change to consumption habits affects the AE function graphically.arrow_forwardAssume the simple spending multiplier equals 10. Determine the size and direction of any changes of the aggregate expenditure line, real GDP demanded, and the aggregate demand curve for each of the following: Spending rises by $8 billion at each spending level Spending falls by $5 billion at each income level Spending rises by $20 billion at each income levelarrow_forward
- The Federal Reserve was very worried about deflation in early 2009, which would raise real interest rates. Suppose the rate of deflation was 2%, unemployment went up 4%, investment spending fell $20 billion during that time, and that the multiplier was 2. Using the information given above, put the relevant data into the formula that defines the spending multiplier in your answer to question 19. Please do not calculate any answer in this question that will be done in question 21. Use of abbreviations used in class content for economic variables is OK.arrow_forwardComplete the statements and then calculate the change in consumption. The consumption function shows the relationship between consumption spending and The slope of the consumption function is the Changes in consumption can be predicted by multiplying the change in by the If the MPC = 0.80 and disposable income increases by $1000, then consumption will increase by what amount? Assume that there is no multiplier effect.arrow_forwardIf a $20 increase in disposable income causes consumer spending to rise by $4, what is the multiplier?arrow_forward
- Consider a hypothetical economy where there are no taxes and no foreign trade, and households spend $0.90 of each additional dollar they earn and ; the marginal propensity to save (MPS) for this save the remaining $0.10. The marginal propensity to consume (MPC) for this economy is economy is ; and the multiplier for this economy is Suppose investment spending in this economy decreases by $150 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 spending on the first two rounds of consumption spending and, eventually, on total output and income. Hint: Be sure to enter a negative sign in front of the number if there is a decrease in consumption. Change in Investment Spending = -$150 billion First Change in Consumption = $ Second Change in Consumption $ Total Change in Output = $ billion billion billion In reality,…arrow_forwardSuppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (ADI). Suppose now that the government increases its purchases by $3.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD) is parallel to AD₁. You can see the slope of AD, by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 AD 100 100 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 AD₂ | | AD₂ The following graph plots equilibrium in the money market at an interest rate of 3% and a quantity of money equal to $30 billion. 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. Money Supply Money…arrow_forwardSuppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $3.5 billion. of Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (ADs) is parallel to ADj. You can see the slope of 4D, by selecting it on the following graph. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2 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_____ Y by______ Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded…arrow_forward
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