Consider a hypothetical economy where there are no taxes and no international tr

Question

Consider a hypothetical economy where there are no taxes and no international trade. Households spend $0.90 of each additional dollar they earn and save the remaining $0.10. If there are no taxes and no International trade, the oversimplified multiplier for this economy is Suppose 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 following table 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 Change in Consumption = Second Change in Consumption = Total Change in Output = Now consider a more realistic case. Specifically, assume that our hypothetical economy opens up to international trade and that its government collects taxes. In this case, the multiplier will be the oversimplified multiplier you found earlier.

Explanation / Answer

1. Multiplier = 1/1-MPC = 1/1-0.90 = 1/.10 = 10

2. First change in consumption = 0.9*200 = 180 billion

Second change in consumption = 0.9*180 = 162 billion

Total Change in output = Mutiplier*Spending = 10*200 = 2000 billion

3.less than

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