Consider a hypothetical economy where there are no taxes and no foreign trade, a

Question

Consider a hypothetical economy where there are no taxes and no foreign trade, and households soend so.90 of each addtional dollar they earn and ave the remaining so.10. The marginal propensity to consume (MPC) for this economy is this economy is : the marginal propensity to save (MPS) for ; and the mutiplier for this economy is suppose investment spending in this economy decreases by $150 bion. The decrease in investment w1ead to . de decrease in consumption that decreases income yet again, and so on ase in incme, generating a Fal in the tollowing table to show the impact of the change in investment spending on the lrst two rounds of consumption spending and, eventually on total output and income Hint: Be sure to enter a negative sign in front of the number if there is a decrease in Chonge in Investment Spending- -$150 billion censumption First Change in Consumprion Second Change in ConsamptionS Total Chonge in Outpt-s In reality, households will not simply spit an i imports will . Now suppose that househoids in this economy allocate each addtional doilar of income in the following way tollar on imported goods. The remaining fraction of each addicional doilar goes toward consumption of domesticaily preduced oueput n this case, the fraction of an adational dollar of Income that is not spent on domestic outout is equal to increase in income between saving and consumption of domestic output. A fraction of the additional of taies, and·todion go to purchases of frign goods (inmports) Accounting for the emects of taxes the multiplier effect you found earser. aetar of income in the folowing wax, Houshotds however, they now pay $0.10 in taxes on each additional doliar of incomm, and they now spend so.20 of each additional contnue to sve so.1oor and imports into consideration, the multiplier for this .Taking the impact of taxes economy is

Explanation / Answer

1. MPC = 0.9/1 = 0.9

MPS = 1-MPC = 1-0.9 = 0.1

Multiplier = 1/MPS = 1/0.1 = 10

2.

First change in consumption = 0.9(-150) = -$135

Second change in consumption = 0.9(-135) = -$121.5

Total change in output = multiplier*change in I = 10(-150) = -$1500

3. Decrease

Fraction not spent on domestic goods = 0.1 + 0.2 = 0.3

Mutliplier = 1/(mps+mpt+mpm) = 1/(0.1+0.1+0.2) = 1/0.4 = 2.5

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.