Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remainin
g $0.25.
The marginal propensity to consume (MPC) for this economy is ___(0.25 / 0.75 / 1 / 1.33 / 4)___ , and the spending multiplier for this economy is ____(0.25 / 0.75 / 1 / 1.33 / 4)____ .
Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to ____(-1,000billion / -500billion / -187.5billion / -93.8billion / -62.5billion)___ . This decreases income yet again, causing a second change in consumption equal to ___(-1000billion / -500billion / -93.8billion / -140.6billion / -62.5billion)____ . The total change in demand resulting from the initial change in government spending is .
The marginal propensity to consume (MPC) for this economy is ___(0.25 / 0.75 / 1 / 1.33 / 4)___ , and the spending multiplier for this economy is ____(0.25 / 0.75 / 1 / 1.33 / 4)____ .
Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to ____(-1,000billion / -500billion / -187.5billion / -93.8billion / -62.5billion)___ . This decreases income yet again, causing a second change in consumption equal to ___(-1000billion / -500billion / -93.8billion / -140.6billion / -62.5billion)____ . The total change in demand resulting from the initial change in government spending is .
1 answer:
Answer and Explanation:
According to the scenario, computation of the given data are as follow:-
1) Marginal propensity to consume (MPC) for this economy is 0.75 as it denotes the spending of the household and saving of 0.25 and the spending multiplier for this economy is
= Spending Multiplier(M)
= 1 ÷ 1 - MPC
= 1 ÷ 1-0.75
= 1 ÷ 0.25
= 4
2). Decrease in government purchases will lead to a decrease in income, generating an initial change in consumption
= -Amount of Government Decrease Purchases by × MPC
= -$250 billion × 0.75
= -$187.5 billion
3). Decrease income again, causing a second change in consumption
= Amount Decrease in Government Purchases × MPC
= -$187.5 billion × 0.75
= $140.6 billion
4).Total change in demand resulting from the initial change in government spending
= Amount of Government Decrease Purchases by × Spending Multiplier(M)
= $250 × 4
= $1,000 billion
= $1 trillion
As we can see that the income falls by $1000 billion in the end, so AD shifts to the left by the size of $1 trillion
In the question the graph is missing. Kindly find the attachment for both of question and answer
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Answer:
D. Tasha: "If coffee drinkers expect the price of coffee to rise next month, then current demand will go up and lead to a price increase this month."
This is the only one with incorrect economic analysis
Explanation:
A. is correct because a shortage of supply would drop the price as we can see in the Graph 1 with the supply curve.
B. is correct because if the two goods are substitues then a lower price for caffeinated soft drinks like Mountain Dew would cause the consumer demand for coffe to go down because the consumers would prefer the good with lower price, rising the demand for Mountain dow in detriment of coffe.
C. is correct as we can see in the Graph 1, the increse in the demand would generate a higher price but it would make the demand go back to D1
D. is incorrect because if coffee drinkers consume more coffee this monht the price would lower.
