TOTAL EXPENDITURE (Billions of dollars) 200 180 160 140 120 100 80 60 40 AE Line 20 MPC=0.70 45-Degree Line о 0 20 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) New AE Line + New Equilibrium ? In the first economy (with MPC = 0.5), the $30 billion increase in investment causes equilibrium output to increase by $ second economy (with MPC = 0.70), the $30 billion increase in investment causes equilibrium output to increase by $ higher MPC is associated with a multiplier. billion. In the billion. Therefore, a Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier 1-MPC For the first economy, with an MPC of 0.5, the effect of the $30 billion increase in investment is as follows:
TOTAL EXPENDITURE (Billions of dollars) 200 180 160 140 120 100 80 60 40 AE Line 20 MPC=0.70 45-Degree Line о 0 20 40 60 80 100 120 140 160 180 200 REAL GDP (Billions of dollars) New AE Line + New Equilibrium ? In the first economy (with MPC = 0.5), the $30 billion increase in investment causes equilibrium output to increase by $ second economy (with MPC = 0.70), the $30 billion increase in investment causes equilibrium output to increase by $ higher MPC is associated with a multiplier. billion. In the billion. Therefore, a Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula: Multiplier 1-MPC For the first economy, with an MPC of 0.5, the effect of the $30 billion increase in investment is as follows:
Chapter9: Aggregate Expenditures
Section: Chapter Questions
Problem 7E
Related questions
Question
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total 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 total expenditure line has a slope of 0.5 and passes through the point (100, 100).
The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100).
Now, suppose there is an increase of $30 billion in investment in each economy.
Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output.
Transcribed Image Text:Place a green line (triangle symbol) on each of the previous graphs to indicate the new total 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 and vertical axis intercept of a line on the graph
by selecting it.)
МРC-0.5
200
45-Degree Line
180
New AE Line
180
140
120
New Equilibrium
100
80
AE Line
40
20
20
40
60
80
100
120
140
160
180
200
REAL GDP (Billions of dollars)
TOTAL EXPENDITURE (Billions of dollars)
Transcribed Image Text:MPC=0.70
200
45-Degree Line
180
New AE Line
160
140
120
New Equilibrium
100
80
80
40
AE Line
20
20
40
60
80
100
120 140
160
180
200
REAL GDP (Billions of dollars)
In the first economy (with MPC = 0.5), the $30 billion increase in investment causes equilibrium output to increase by $
billion. In the
second economy (with MPC = 0.70), the $30 billion increase in investment causes equilibrium output to increase by $
billion. Therefore, a
higher MPC is associated with a
v multiplier.
Now, confirm your graphical analysis algebraically using the oversimplified multiplier formula:
Multiplier = 1 MPC
For the first economy, with an MPC of 0.5, the effect of the $30 billion increase in investment is as follows:
TOTAL EXPENDITURE (Billions of dollars)
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