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 $150 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 SpendingChange in Investment Spending	=  =	?$150 billion?$150 billion
First Change in ConsumptionFirst Change in Consumption	=  =	billion
Second Change in ConsumptionSecond Change in Consumption	=  =	billion
••		••
••		••
••		••
Total Change in OutputTotal Change in Output	=  =	billion

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.

Suppose that the price level in our economy remains the same but now, out of each additional dollar of income, households save $0.10, pay $0.10 in taxes, and spend $0.20 on imported goods. In this case, accounting for the impact of taxes and imports, the multiplier in this economy is, and a $150 billion decrease in investment spending will lead to abillion in output.