Answered: Due to an increase in consumer wealth,…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

ChapterD: The Expenditure-output Model

Section: Chapter Questions

Problem 24CTQ: Exercise D24 Compare two policies: a tax cut on income or an increase in government spending on...

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Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

Westlandia
Eastlandia
Incremental
Total
Total
change
in GDP
Incremental
change
in GDP
AC - $40 billion
change
in GDP
change
in GDP
Rounds
Rounds
1
AC- $40 billion
MPC x AC -
2
MPC x AC-
3
MPC x MPC × AC=
3
MPC × MPC × AC =
MPC x MPC x MPC x AC -
MPC x MPC x MPC x AC -
Total
change
in GDP
Total
change
in GDP
(1/(1 - МPC)) х ДС- ?
(1/(1 - МPС) х ДС - ?
1.

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