Assume the simple spending multiplier
equals 10. Determine the size and direction of any changes in the
aggregate expenditure line, real GDP demanded, and the aggregate
demand curve for each of the following changes in spending:
a. Spending rises by $8 billion at each income level.
b. Spending falls by $5 billion at each income level.
c. Spending rises by $20 billion at each income level.
Use the multiplier. a) 8*10=80, b) -5*10=-50 and c) 20*10=200
Again, Am I missing something, some part of the problem, here?
(Simple Spending Multiplier) Suppose that the MPC is 0.8, while investment, government purchases, and net exports sum to $500 billion. Suppose also that the government budget is in balance. a. What is the sum of saving and net taxes when desired spending equals real GDP? Explain. b. What is the value of the multiplier? c. Explain why the multiplier is related to the slope of the consumption function. Totally lost on how to figure this out. I think with an MPC of .8 the multiplier is 5, but I don't know where to go from there. Anjaree, thanks, but that much I knew. I don't know how to turn that knowledge into the answers.
Asked by Bruce Teague - Mon Jul 11 06:13:11 2011 - Economics - 2 Answers - Comments
A. The slope of the consumption function is MPC=0.8.Multiplier=1/1-MPC. Must I say that he slope of the consumption function is positively correlated with the multiplier.High MPC,high multiplier effects.
To determine the size and direction of changes in the aggregate expenditure line, real GDP demanded, and the aggregate demand curve for each scenario, we need to use the simple spending multiplier.
The simple spending multiplier is calculated as:
Multiplier = 1 / (1 - MPC)
Where MPC is the marginal propensity to consume.
a. Spending rises by $8 billion at each income level:
Given the simple spending multiplier equals 10, we can calculate the change in real GDP demanded as follows:
Change in real GDP demanded = Multiplier * Change in spending
= 10 * $8 billion
= $80 billion
Therefore, there will be an increase of $80 billion in real GDP demanded and the aggregate expenditure line will shift upward by $8 billion at each income level. This will result in an increase in the aggregate demand curve.
b. Spending falls by $5 billion at each income level:
Similarly, when spending falls by $5 billion at each income level:
Change in real GDP demanded = Multiplier * Change in spending
= 10 * (-$5 billion)
= -$50 billion
As a result, there will be a decrease of $50 billion in real GDP demanded and the aggregate expenditure line will shift downward by $5 billion at each income level. This will cause a decrease in the aggregate demand curve.
c. Spending rises by $20 billion at each income level:
Again, using the simple spending multiplier:
Change in real GDP demanded = Multiplier * Change in spending
= 10 * $20 billion
= $200 billion
Thus, there will be an increase of $200 billion in real GDP demanded and the aggregate expenditure line will shift upward by $20 billion at each income level. Consequently, the aggregate demand curve will also increase.
To determine the size and direction of changes in aggregate expenditure line, real GDP demanded, and the aggregate demand curve for each change in spending, we need to use the formula for the simple spending multiplier.
The simple spending multiplier (MPS) is calculated as:
MPS = 1 / (1 - MPC)
Where:
MPC (Marginal Propensity to Consume) is the fraction of additional income that is spent.
Now let's analyze each scenario:
a. Spending rises by $8 billion at each income level.
In this case, we need to find the change in aggregate expenditure (AE), real GDP demanded (real GDPd), and the aggregate demand curve.
Using the spending multiplier formula, we have:
MPS = 1 / (1 - MPC)
10 = 1 / (1 - MPC)
Solving for MPC:
MPC = 1 - 1/10
MPC = 9/10
Now, we can calculate the change in aggregate expenditure (AE):
Change in AE = MPC * Change in spending
Change in AE = (9/10) * $8 billion
Change in AE = $7.2 billion
The aggregate expenditure line will shift upward by $7.2 billion. Real GDP demanded will also increase by $7.2 billion. This increase in spending will shift the aggregate demand curve to the right.
b. Spending falls by $5 billion at each income level.
Using the same formula, we can calculate the MPC as:
MPC = 1 - 1/10
MPC = 9/10
Now, we can calculate the change in aggregate expenditure (AE):
Change in AE = MPC * Change in spending
Change in AE = (9/10) * (-$5 billion)
Change in AE = -$4.5 billion
The aggregate expenditure line will shift downward by $4.5 billion. Real GDP demanded will decrease by $4.5 billion. This decrease in spending will shift the aggregate demand curve to the left.
c. Spending rises by $20 billion at each income level.
Using the same formula, we can calculate the MPC as:
MPC = 1 - 1/10
MPC = 9/10
Now, we can calculate the change in aggregate expenditure (AE):
Change in AE = MPC * Change in spending
Change in AE = (9/10) * $20 billion
Change in AE = $18 billion
The aggregate expenditure line will shift upward by $18 billion. Real GDP demanded will increase by $18 billion. This increase in spending will shift the aggregate demand curve to the right.
In summary:
a. Spending rises by $8 billion: Aggregate expenditure line shifts upward by $7.2 billion, real GDP demanded increases by $7.2 billion, and the aggregate demand curve shifts to the right.
b. Spending falls by $5 billion: Aggregate expenditure line shifts downward by $4.5 billion, real GDP demanded decreases by $4.5 billion, and the aggregate demand curve shifts to the left.
c. Spending rises by $20 billion: Aggregate expenditure line shifts upward by $18 billion, real GDP demanded increases by $18 billion, and the aggregate demand curve shifts to the right.