4 The Multiplier Effect Of A Change In Government Purchases Consider A Hypothetical Dosed Economy In Which Households S 1 (19.42 KiB) Viewed 54 times
4 The Multiplier Effect Of A Change In Government Purchases Consider A Hypothetical Dosed Economy In Which Households S 2 (35.42 KiB) Viewed 54 times
4. The multiplier effect of a change in government purchases Consider a hypothetical dosed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $350 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, The total change in demand resulting from the initial change in causing a second change in consumption equal to government spending is The following graph shows the aggregate demand curve (AD.) for this economy before the change in government spending.
The following graph shows the aggregate demand curve (AD₂) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD). You can see the slope of AD, by selecting it on the graph. 140 AD 135 AD₂ 130 125 120 PRICE LEVEL 115 110 105 100 O 2 3 0 OUTPUT (Trillions of dollars)
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