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Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20.
The marginal propensity to consume (MPC) for this economy is0.8 , and the spending multiplier for this economy is5 .
Suppose the government in this economy decides to increase government purchases by $300 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is .
The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending.
Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the spending multiplier effect takes place.
Hint: Be sure that the new aggregate demand curve (AD2AD2) is parallel to the initial aggregate demand curve (AD1AD1). You can see the slope of AD1AD1 by selecting it on the graph.

Sagot :

The total change in demand resulting from the initial change in government spending is $1.5 trillion to the right

What is an MPC?

The percentage of an overall salary increase that a customer spends on purchasing goods and services rather than saving is known as the marginal propensity to consume (MPC) in economics. The Keynesian macroeconomic theory includes a concept known as the marginal propensity to consume, which is determined as the change in consumption divided by the change in income.

A consumption line, which is a sloped line made by charting the change in income on the horizontal "x" axis and the change in consumption on the vertical "y" axis, is used to represent MPC.

  • The percentage of additional income that is spent on consumption is known as the marginal propensity to consume.
  • Depending on income, MPC fluctuates.
  • MPC tends to be lower at higher income levels.
  • The Keynesian multiplier, which describes the impact of additional investment or government spending as an economic stimulus, is mostly determined by MPC.

MPC=0.8

Multiplier=1/(1-MPC)=1/(1-0.8)=5

$300 billion more in government purchases

The initial change in consumption is equal to $300 billion times 0.8, or $240 billion.

$240 billion*0.8 to equal $192 billion for the second shift in consumption.

Demand fluctuation as a whole = $300 billion*5 = $1500 billion

$500 billion

the AD curve moves $1.5 trillion to the right.

Learn more about MPC from the link below

https://brainly.com/question/29645795

#SPJ4

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