x y Apla: Student Question x bGuid C4PLCOA001010000003b2576100a00008 ctx-amcleod

Question

x y Apla: Student Question x bGuid C4PLCOA001010000003b2576100a00008 ctx-amcleod-01068ck-m 1512697052605 0AAA6B Q4PLCO400101 quiz action takeQuizBoquiz TAYLOR Keley 01 Principles of Macro. Fall 2017 Home Grades Personalined Reviews Dcunsion Coune The Influence of Monetary and Fiscal Policy on Aggregate Demand: Algorithmic End of Chapter Graded Assignment Read Due Sunday 12 1017 at 13:45 PM Keep the Highest: 12 Attempts 7 Problees and Applications o Suppoue economists observe that an increase in govemment spending of $15 billion raises the total demand for goods and services by $60 billion these economists ignore the possubility of crowdng out, they wouild estmate the marginal progensity to conaume (MPC) to be Now suppose the econonists allow for crowding out. Their new estimate of the MPC wauld be here to search DOLL F3 F4 F7 F8 F10 F11 F12 Priscr sertDelete

Explanation / Answer

(a)

Spending multiplier = Increase in total demand for goods & services / Increase in government spending

= $60 billion / $15 billion

= 4

Multiplier = 1 / (1 - MPC)

4 = 1 / (1 - MPC)

4 - 4 x MPC = 1

4 x MPC = 3

MPC = 3/4 = 0.75

(b) Lower than

Crowding out means that higher government spending will increase borrowing, raising interest rates which will dampen investment. Lower investment will decrease aggregate demand, and the rise in total demand for goods & services when government spending rises by $15 billion will be lower than $60 billion. Therefore, multiplier will be lower. Since value of multiplier is directly related with MPC, lower value of multiplier will mean MPC is lower.

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