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soldier1979 [14.2K]
3 years ago
11

Consider a hypothetical closed economy in which households spend $0.70 of each additional dollar they earn and save the remainin

g $0.30. The marginal propensity to consume (MPC) for this economy is , and the 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 .
Business
1 answer:
navik [9.2K]3 years ago
7 0

Answer:

(a) 0.7

(b) 3.33

(c) -$210

(d) -$147

(e) -$1 trillion

Explanation:

(a) Marginal propensity to consume (MPC) = 0.7

(b) Multiplier of this economy:

=\frac{1}{1-MPC}

=\frac{1}{1-0.7}

      = 3.33

(c) Decrease government purchases by $300 billion,

Initial change in consumption = Change in government purchases × MPC

                                                  = $300 × 0.7

                                                  = -$210 billion

(d) This decreases income yet again, causing a second change in consumption equal to:

= Initial change in consumption × MPC

= -$210 × 0.7

= -$147 billion

(e) The total change in demand resulting from the initial change in government spending is:

= Change in government purchases × Multiplier

= $300 × 3.33

= -$1 trillion

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