Consider a hypothetical closed economy in which households spend $0.70 of each additional dollar they earn and save the remaining $0.30.
The marginal propensity to consume (MPC) for this economy is _____, and the expenditure multiplier for this economy is _____.
Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to _____. This decreases income yet again, causing a second change in consumption equal to ______. The total change in demand resulting from the initial change in government spending is _____ .
The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out."
Hint: Be sure that the new aggregate demand curve (AD2AD2) is parallel to the initial aggregate demand curve (AD1AD1). You can see the slope of AD1AD1 by selecting it on the graph.
MPC = 0.7
Expenditure multiplier = 1/1-MPC = 1/1-0.7=3.3
Change in consumption = 0.7 *$300= $210
Change in another consumption= 0.7*$210=$147
Total demand change = -$300* 3.33 =$999
The New AD curve will shift left ward parallel to the initial curve.
> and i’d just like to say that for some ppl it’s INCORRECT:) wow how crazy right? there’s another graph but instead of the line being shifted left or right, it’s completely straight
Gabby Laubsch Fri, Mar 18, 2022 7:29 AM
> I know this might be even crazier, but if its not correct for you then this isn't the question you have :) Why downvote the answer provided for this specific question, when its you whos dumb enough to use the same answer for 2 different questions
Jay Tue, Apr 5, 2022 6:15 PM
Consider a hypothetical closed economy in which households spend$0.70 of each additional dollar they earn...
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> I saw the 11 dislikes and want to let everyone know that these answers are CORRECT for this particular problem. I just hit Grade It Now and got 3/3. Thanks for your help!
Baxter9205 Wed, Dec 1, 2021 11:59 PM