HomeworkLib
Question

Assume the MPC = 0.80. And, assume that the economy suddenly moves away from the stability...

Assume the MPC = 0.80. And, assume that the economy suddenly moves away from the stability condition and a recessionary gap emerges. If this initial movement away from full-employment GDP originated via a $200 billion decrease in private sector business investment spending (I), AD will eventually _______ by a cumulative total of _______.

business   economics   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer
AD will eventually decrease by a cumulative total of $1000 billion.
---------

The investment spending decreases mean AD will decrease. the total effect of it is a
total effect on AD=change in investment *multiplier
Multiplier =1/(1-MPC)=1/(1-0.8)=5
change in AD=5*200=$1000 billion

0 0
Add a comment
Know the answer?
Add Answer to:
Assume the MPC = 0.80. And, assume that the economy suddenly moves away from the stability...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • 3. You are given the following information about the economy: autonomous consumption = $300 billion      ...

    3. You are given the following information about the economy: autonomous consumption = $300 billion       planned investment = $300 billion government spending = $500 billion             mpc = .8 imports = $200 billion                                    exports = $500 billion                        a. Using the values above, what is the equation for the consumption function? b. Using the values above, what is the income/spending multiplier? c. What is the value of Net Exports? d. Is there a trade surplus or deficit? Of how much?...

  • Assume the marginal propensity to consume (MPC) is 0.75 and the economy is in recession with real GDP $1 trillion below...

    Assume the marginal propensity to consume (MPC) is 0.75 and the economy is in recession with real GDP $1 trillion below full-employment real GDP. To achieve full employment, aggregate demand (AD) must be increased $2 trillion. Following discretionary fiscal policy, government spending should be increased:

  • Suppse the government wants to use fiscal policy to return the economy from a recessionary gap...

    Suppse the government wants to use fiscal policy to return the economy from a recessionary gap to a full-employment equilibrium.What policies mught they consider? with the as-ad graph, discuss the adjustment process in the private sector by the fiscal stimulus

  • Assume the economy as reflected in the equilibrium point of AD/AS is at full employment GDP...

    Assume the economy as reflected in the equilibrium point of AD/AS is at full employment GDP at an output of $17 trillion Consumer confidence has increased with news of large stock market gains. As a result, $ 1 trillion dollars of spending increases from consumers. What happens initially to AD and what is the level of output now? Assuming a mpc of 0.8, what will happen to real GDP after all rounds of spending have been completed? Show your calculation...

  • Assume that the economy is$500 billion above its full-employment GDP and the marginal propensity to consume...

    Assume that the economy is$500 billion above its full-employment GDP and the marginal propensity to consume is 0.75 Give a fiscal policy recommendation to close the gap in GDP. How much is needed? Note: This will depend on what fiscal policy tool you recommend in a) Show your calculations to receive full points. (you can assume AD shortfall = GDP gap) How would this policy change affect the economy's budget position?

  • 1. Suppose in a simple closed economy with MPC = 0.75, the planned investment spending nas...

    1. Suppose in a simple closed economy with MPC = 0.75, the planned investment spending nas suddenly fallen, reducing AD and output to a level that below the natural level of output by 100 Million. Assume that the real interest rate is constant so that there is no crowding out of (gross) investment. (a) If the government decided to try to get the output back to the natural level of output using only a change in government spending (AG), by...

  • Use the following macroeconomic model structure to answer the questions followed. 8 pts C = 300...

    Use the following macroeconomic model structure to answer the questions followed. 8 pts C = 300 + 0.8Yd; C = consumption function; Yd (Y-T) = disposable income I = 200; I = Investment G = 400; G = Government expenditure T = 200; T = Tax revenue Also assume that Yf = Full employment GDP (Potential GDP) = 5,000 8.1. The equilibrium GDP level (income) is _________. Hint: Ye = C+I+G a. 2,850 b. 3,700 c. 3,145 d. 3,800 8.2....

  • Suppose that the economy is shown to the right. This economy is currently experiencing O A....

    Suppose that the economy is shown to the right. This economy is currently experiencing O A. a recessionary gap. O B. an inflationary gap. O C. deflation. LRAS SRAS O D. crowding out Using the line drawing tool, draw and label the fiscal policy correction that would bring the economy to full employment GDP Properly label this line. Carefully follow the instructions above, and only draw the required objects AD 2 4 6810 12 14 16 18 20 Real GDP...

  • Use the following macroeconomic model to answer questions from Q1 through Q11: C 115 + 0.75Yd,...

    Use the following macroeconomic model to answer questions from Q1 through Q11: C 115 + 0.75Yd, where C = Consumption function; Yd (Y-T-Disposable income I 150; Investment G-200; G Government expenditure T-100; T = Tax revenue 40; X = Export M = 30; M-Import Also assume that Yf Full employment GDP (potential GDP) 2,000 a1. Estimate the equilibrium GDP level (income, Ye). Q2. Estimate the level of aggregate consumption (C) Q3. Estimate the level of aggregate saving (S) Q4. The...

  • Multiple Choice: 1) Assume the MPC is 0.75 and lump sum taxes are collected by the government. What is the governm...

    Multiple Choice: 1) Assume the MPC is 0.75 and lump sum taxes are collected by the government. What is the government tax multiplier? A)-1.33 B) - 25 C) - 75 D) -4 E) -3 , which the recessionary gap. 2) During a Recession, the MPC tends to a) Increase, increases b) Decrease, decreases c Decrease, increases d) Increase, decreases 3) Suppose that the MPC is.75 and the US Federal Government reduces taxes by 10 million dollars. After 3 rounds of...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT