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Chapter 12: Q.18 (page 279)

Consider Figure 12-7, which applies to an economy in which the marginal propensity to consume is 0.8. Why does a \(0.1 trillion increase in planned real investment spending cause the aggregate demand curve to shift rightward by exactly \)0.5 trillion at the initial equilibrium price level of 110?

Short Answer

Expert verified

It is due to the multiplier effect

Step by step solution

01

introduction

Multiplier estimates the impact of an adjustment of any exogenous variable fair and square of GDP or result. It shows how much the total result (Y) changes for a given change in independent variables, for example, investment, government spending, and so forth.

02

explanation

We know,

change in autonomous variables = ∆A

change in real GDP = ∆Y

mpc = marginal propensity to consume

Multiplier size = ΔY=ΔA1−mpc

localid="1651931995158" ΔYΔA=10.2=5

Change in income = 5×0.1= $5trillion

This causes the aggregate demand curve to shift rightward by exactly $0.5trillion at the initial equilibrium price level of110

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Most popular questions from this chapter

At an initial point on the aggregate demand curve, the price level is 100, and real GDP is S18trillion. After the price level rises to 110 , however, there is an upward movement along the aggregate demand curve, and real GDP declines to S14trillion. If total planned spending declined by 200 billion in response to the increase in the price level, what is the marginal propensity to consume in this economy?

Consider the current equilibrium real GDP level of \( 18.0 trillion displayed in Table 12-2. Based on your answer to Problem 4, if real government spending were to decrease by \)1.0 trillion, what would be the resulting change in real GDP? What would be the new equilibrium level of real GDP? Verify that at the new level of government spending, this new equilibrium real GDP equals C+I+G+NX.

The multiplier in a country is equal to5, and households pay no taxes. At the current equilibrium real GDP of \(14trillion, total real consumption spending by households is \)12trillion. What is real autonomous consumption in this country?

Consider movements from points F to K in both panels of Figure 12-1. Use the resulting changes in planned real consumption and saving corresponding to the change in real disposable income to calculate the marginal propensities to consume and to save.

In principle, what might be possible causes of the observed diminishment of the rightward shifts of Germany's investment function over time? (Hint: Recall that changes in productive technology or business tares affect levels of planned investment spending.)
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