Question

2. If the MPC were o.9 and government increased spending by $100 billion. (a) How much spending would occur in the third cycle of the figure below? (b) How many spending rounds would occur before consumer spending increased by $300 billion? The third cvcle there would bdBI billion of

Answer 1

1 To sofre the question, we will use the concept of expenditure multplien which is the ratio of I change in aggregate expenditure which cause the change in cop - Spending multiplien: 1 1- MPC (*: 1 - MPC : MPS) so spending multiplier - - - given statement is MPC: 0.9 Government Ised spending = Now $100 billion Cins Round 1 Incore meme oma l mPcloped MPSC Save final 1 1 2 3 100 90 0.9 0.9 0.1 0.1 90 81 L L So, it is clear from the above table that Scanlin third id cycle$'81 billion spending w ould occur CamScanner

-.(b) T Round Increase Lavernment (in $billion) to hispendio mpc (Spend 907. MPS ( Save 10-) Fihal Spending 1oo | 100 100 -0, 97 od 902 0.9 0. 1 90 81 (100-10) 819 (90-9-81) | 72.109, |(81-8.1) 0.9 0. Over the first four rounds of aggregate expenditures, the impact of original increase in' government spending of $100 ° 100+ 90+81+72. 10 - $343.10 billion (which exceeds $300 billion), so rounds would occur before consumer spending increase by $300 Scabillionthare 3 rounds), which have sum total of $92 al of $27 leion CamScanner