Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 10, Problem 10P
To determine
The MPC and Multiplier.
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Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process.
what is the MPC?
What is the size of the Multiplier?
If, instead, GDP and consumption both rose by $8 billion in the second round, what would have been the size of the multiplier?
Suppose that the initial 10 billion increase in the investment spending expands GDP by 10 billion in the first round of multiplier process. If GDP and consumption both rise by 6 billion in the second round of the process, what is the MPC in this economy? What is the size of the multiplier? If instead, GP and consumption both Rose by 8 billion in the second round, what would’ve been the size of the multiplier? 
Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?
Chapter 10 Solutions
Macroeconomics
Ch. 10.2 - Prob. 1QQCh. 10.2 - Prob. 2QQCh. 10.2 - Prob. 3QQCh. 10.2 - Prob. 4QQCh. 10.5 - Prob. 1QQCh. 10.5 - Prob. 2QQCh. 10.5 - Prob. 3QQCh. 10.5 - Prob. 4QQCh. 10 - Prob. 1DQCh. 10 - Prob. 2DQ
Ch. 10 - Prob. 3DQCh. 10 - Prob. 4DQCh. 10 - Prob. 5DQCh. 10 - Prob. 6DQCh. 10 - Prob. 7DQCh. 10 - Prob. 8DQCh. 10 - Prob. 9DQCh. 10 - Prob. 1RQCh. 10 - Prob. 2RQCh. 10 - Prob. 3RQCh. 10 - Prob. 4RQCh. 10 - Prob. 5RQCh. 10 - Prob. 6RQCh. 10 - Prob. 7RQCh. 10 - Prob. 8RQCh. 10 - Prob. 9RQCh. 10 - Prob. 1PCh. 10 - Prob. 2PCh. 10 - Prob. 3PCh. 10 - Prob. 4PCh. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - Prob. 7PCh. 10 - Prob. 8PCh. 10 - Prob. 9PCh. 10 - Prob. 10P
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- What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0, .4, .6, and 1? What will it be when the MPC is 1, .90, .67, .50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is .80? If the MPC is .67?arrow_forwardIf a $20 increase in disposable income causes consumer spending to rise by $4, what is the multiplier?arrow_forwardConsider 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_forward
- 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 (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 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. (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD 1 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 AD2 AD 3arrow_forwardShow the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. INTEREST RATE 15.0 12.5 10.0 7.5 5.0 2.5 0 0 15 Money Supply known as the Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply image 2 Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 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 by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by ▼at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is ▼ effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the…arrow_forward
- There might be many factors (economic and non-economic) that affect the size of the multiplier. What are some that you think could influence its size? Which ones do you think would make it larger, and which are more likely to make it smaller?arrow_forwardSuppose that an initial $ 10 billion increase in investment spending expands GDP by $ 10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $ 6 billion in the second round of the process. Instructions: In parts a and b, round your answers to 1 decimal place. In part c enter your answer as a whole number. A) What is the MPC in this economy? B) What is the size of the multiplier? C) If, instead, GDP and consumption both rose by $ 8 billion in the second round, what would have been the size of the multiplier?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_forward
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