The choices for the drop downs are 1st drop down- .3, .7, 1, 1.43, 3.3333 2nd dr

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The choices for the drop downs are 1st drop down- .3, .7, 1, 1.43, 3.3333 2nd drop down- .3, .7, 1, 1.43, 3.3333 3rd drop down -90billion, -1000b, -210b, -500b, -105b 4th drop down- -90b, -105b, -500b, -1000b, -147b 5th drop down- -0.6Trillion, -0.7t, -1t, -2.1 t

tabllity: A Critique of the Self-Regulating Economy Graded Assignment | Read Chapter 10 | Back to Assignment Due Sunday 05.01.16 at 11:45 PM Attempts: Average: /3 4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.70 of each additional dollar they earn and save the remaining $o.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 second change in consumption equal to .. This decreases income yet again, causing a . The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD) for this economy before the change in government spending demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that Use the green line (triangle symbol) to plot the new aggregate there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD,). You can selecting it on the graph to the initial aggregate demand curve (AD,). You can see the slope of AD, by

Explanation / Answer

MPC is 0.7

Multiplier is

1/1-MPC

1/1-0.7= 1/0.3= 3.3

3.3 is multiplier effect

So now we have to take somethint like government spending decrease by 300 billion dollars

Then 3.3 times 300 billion

Here it happens in 3 stages

first stage government removed So 270 billion is removed from market excluding saving

Next stage 189 billion is removed

Next stage 132.3 billion is removed.

A total of 591 billion dollars removed

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