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Chapter 13: Q.19 (page 298)

Recall that the Keynesian spending multiplier equals 1 /(1-M P C). Suppose that in Figure 13-4, the MPC is equal to 0.9. In addition, the amount of the horizontal leftward shift from AD2 to AD3 caused by a crowding-out effect on planned investment spending was 0.5\( trillion, or \) 500 billion. How much investment spending was crowded out?

Short Answer

Expert verified

investment spending of $50billion was crowded out

Step by step solution

01

introduction

Arranged Investment Spending alludes to the sum that the private area firms intend to spend on stock and acquisition of capital merchandise during a given timeframe.

Marginal Propensity to Consume alludes to the extent of the absolute expansion in discretionary cash flow that families give to utilization.

02

explanation

Given,

MPC = 0.9

Calculating the spending multiplier,

=11−MP=11−0.9=10

Crowded out planned investment spending = ∆I

A leftward shift in AD curve = ∆AD

Crowded out planned investment spending is calculated

ΔI=ΔADspending multiplier

ΔI=$500billion10ΔI=$50billion.

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Most popular questions from this chapter

List and define fiscal policy time lags and explain why they complicate efforts to engage in fiscal "fine tuning".

Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (a) of Figure 13-1, the government determined that the amount by which the AD curve had to be shifted directly rightward from the point E1 was equal to \(1.0 trillion. If the government decided that a \)0.2 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC?

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