1. The multiplier Aa Aa Consider a hypothetical economy without government or in
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1. The multiplier Aa Aa Consider a hypothetical economy without government or international trade. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is for this economy is the marginal propensity to save (MPS) for this economy is and the multiplier Next, suppose that investment spending in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the table below to show the impact of the change in investment spending on the first two rounds of consumption spending and, eventually, on total output and income. Change in Investment Spending-$200 billion First-Round Change in Consumption Second-Round Change in Consumption - - Total Change in Output $3 trillion $200 bilion -$500 billion -$2.5 trillionExplanation / Answer
Consider a hypothetical economy without government or international trade . Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.60 ; the marginal propensity to save (MPS) for this economy is 0.40 ; and the multiplier for this economy is 1.67
Next suppose that investment spending in this economy decreases by $200 billion. The decrease in investment will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the table below to show the impact of the change in investment spending on the first two round of consumption spending and eventually, on total output and income.
Change in Investment spending = -$200 billion
First-Round Change in consumption = -$120 billion
Second-Round Change in consumption = -$72 billion
Total Change in Output = -$500 billion
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