Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 32.A, Problem 2AP
To determine
Aggregate Demand Shifts and the Aggregate Expenditure Model.
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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
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AD,
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OUTPUT (Bilions of dollars)
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AD₂
AD₂,
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Explain how MPC and the multiplier effect would impact a government’s attempt to stimulate its economy in each of the following scenarios.
To stimulate the economy already in a serious recession, the government spends a total of $700 million to construct nationwide highspeed internet infrastructure so that all areas of the country, especially the rural areas will have highspeed internet service.
13. Assuming that an economy’s aggregate demand is given by its domestic consumption C and investment I, AD = C + I = c0 + c1Y + I. In the economy’s goods market equilibrium, this equals its output: AD = Y. Solving for Y this yields: Y = [1/(1 -c1 )] (c0+ I) Given this equation, which of the following statements is correct? 1. The multiplier is given by 1 – c1. 2. The boost in the economy’s output is the same, regardless of whether the aggregate demand shock comes from an increase in investment I or in autonomous consumption c0. 3. The larger the marginal propensity to consume (c1), the smaller the multiplier. 4. If c1 = 1/3, then a £1 million increase in investment would result in a £2 million increase in output. 14. In the US and the UK, loans are…
Chapter 32 Solutions
Economics (Irwin Economics)
Ch. 32.7 - Prob. 1QQCh. 32.7 - Prob. 2QQCh. 32.7 - Prob. 3QQCh. 32.7 - Prob. 4QQCh. 32.A - Prob. 1ADQCh. 32.A - Prob. 2ADQCh. 32.A - Prob. 1ARQCh. 32.A - Prob. 2ARQCh. 32.A - Prob. 1APCh. 32.A - Prob. 2AP
Ch. 32 - Prob. 1DQCh. 32 - Prob. 2DQCh. 32 - Prob. 3DQCh. 32 - Prob. 4DQCh. 32 - Prob. 5DQCh. 32 - Prob. 6DQCh. 32 - Prob. 7DQCh. 32 - Prob. 8DQCh. 32 - Prob. 9DQCh. 32 - Prob. 1RQCh. 32 - Prob. 2RQCh. 32 - Prob. 3RQCh. 32 - Prob. 4RQCh. 32 - Prob. 5RQCh. 32 - Prob. 6RQCh. 32 - Prob. 7RQCh. 32 - Prob. 8RQCh. 32 - Prob. 9RQCh. 32 - Prob. 1PCh. 32 - Prob. 2PCh. 32 - Prob. 3PCh. 32 - Prob. 4PCh. 32 - Prob. 5P
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- . Using the appropriate formulas and an MPC of 0.85, calculate the multipliers for each of the two scenarios. Next, calculate the overall impact each will have on the increase in money circulating through the economy. To stimulate an economy in a serious recession, the government spends a total of $700 million to send each person a stimulus check worth $600. 2.To stimulate an economy in a serious recession, the government spends a total of $700 million to construct nationwide high-speed internet infrastructure so that all areas of the country, especially rural areas, will have high speed internet service. (Enter response here.)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_forwardRefer to the accompanying table in answering the questions that follow: (3) Aggregate Expenditures (Ca + Ig + Xn + G), Billions $ 520 (1) Possible Levels of (2) Real Domestic Output, Billions $ 500 Employment, Millions 70 90 550 560 110 600 600 130 650 640 150 700 680 Instructions: In parts a-c, enter your answers for the multiplier as a whole number. In part c, round your answers for the MPC and MPS to 1 decimal place. a. If full employment in this economy is 150 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? (Click to select) What will be the consequence of this gap? (Click to select) By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to (Click to select) v by $ billion. What is the multiplier in this example? b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $500 billion?…arrow_forward
- The levels of real disposable income and aggregate expenditures for an economy are given in the following table. -- Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the 45-degree line, where aggregate expenditures equal real GDP. Use the black point (plus symbol) to indicate equilibrium real GDP. - - In the previous graph, if the economy produces at an output level that is higher than equilibrium GDP, then the economy is in because aggregate expenditures are real GDP, and unplanned inventory investment is Read GDP (Y) Aggregate Expenditures (AE) (Trillions of dollars per year) (Trillions of dollars per year) 0 1 1 1.75 2 2.5 3 3.25 4 4 5 4.75 6 5.5 7 6.25 8 7 Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the…arrow_forwardAssuming the MPC = 0.75, determine the size of the simple spending multiplier, the size and direction of the shift in the aggregate expenditure line, the size and direction of the total change in real GDP demanded, and the size and direction of the shift in aggregate demand following a $20 billion decrease in autonomous investment. Illustrate your answer with graphs of the aggregate expenditure line and the aggregate demand curve (showing how the curves shift) . Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardRefer to the accompanying table in answering the questions that follow: (1) Possible Levels of Employment, Millions (2) Real Domestic Output, Billions $450 (3) Aggregate Expenditures (Ca + Ig + X, + G), Billions 50 $470 80 500 510 110 550 550 140 600 590 170 650 630 Instructions: In parts a-c, enter your answers for the multiplier as a whole number. In part c, round your answers for the MPC and MPS to 1 decimal place. a. If full employment in this economy is 170 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? (Click to select) What will be the consequence of this gap? |(Click to select) By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? Aggregate expenditures would have to (Click to select) ♥ by $ billion. What is the multiplier in this example? b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $450 billion?…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_forwardThe 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_forwardConsider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and aggregate expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial aggregate expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.75. Therefore, its initial aggregate expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new aggregate expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope…arrow_forward
- PRICE LEVEL Suppose 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 $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. 116 114 112 110 AD₁ 108 106 104 12 102 100 100 102 104 106 108 110 112 114 116 38.3¢ AD 3 (?)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 (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_forwardThe consumption function is C = $400 billion +0.6Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with: a) a $20 billion increase in government purchases? b) a $20 billion tax cut? c) a $20 billion increase in income transfers? What will the cumulative AD shift be for:arrow_forward
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