Scenario 34-2. The following facts apply to a small, imaginary economy. Consumpt

Question

Scenario 34-2. The following facts apply to a small, imaginary economy. Consumption spending is S6,720 when income is $8,000. Consumption spending is S7,040 when income is $8,500. 15. Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500? a. A stock-market boom stimulates consumer spending by S300, and there is an operative crowding-out effect. b. A stock-market boom stimulates consumer spending by S550, and there is a small operative crowding-out effect. effect. effect. c. An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding-out d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out

Explanation / Answer

You need to find the multiplier. Here MPC = (7040-6720)/(8500-8000) = 0.64. Hence MPS = 0.36 and multiplier = 1/MPS = 1/0.36 = 2.7778

To increase AD by 1500, we need an autonomus increase of 1500/2.77 = 540.

Closest option is the increase in consumption spending by 550 with little crowding out that reduces an increase of 550 to 540.

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