Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The multiplier for this economy is . Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $300 billion First Change in Consumption = billion
Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The multiplier for this economy is . Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $300 billion First Change in Consumption = billion
Chapter19: The Keynesian Model In Action
Section: Chapter Questions
Problem 7SQP
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Consider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The multiplier for this economy is
.
Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on.
Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income .
Note: Use negative signs if numbers are negative.
| Change in G | = | $300 billion |
| First Change in Consumption | = |
|
| Second Change in Consumption | = |
|
| • | • | |
| • | • | |
| • | • | |
| Total Change in Income | = |
|
Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be
; thus, if taxes change by $300 billion, spending will change by
billion.
Based on your results, this Keynesian model predicts that a change in will have the larger effect on income, given the initial change in planned expenditures is of the same magnitude.
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