Question

example: assume the marginal propensity to save is 0.1. how will a decrease in taxes of $50 billion and a decrease in government spending of $50 billion affect aggregate demand? 1. if the marginal propensity to consume is 0.75, then a $100 increase in investment will result in a maximum increase in equilibrium real gross domestic product of 2. the table below shows the level of household savings at various levels of disposable income in a country. savings disposable income $2,000 $10,000 $2,500 $12,000 what is the mps? what is the spending multiplier? part 2 – short-run disequilibrium example: according to the graph above and starting with the equilibrium point r, which of the following shifts identifies the short-run and long run impact of a cost - push inflation?

Explanation:

Problem 1:

Step 1: Recall the spending multiplier formula

The spending multiplier \( k \) is given by \( k=\frac{1}{1 - MPC} \), where \( MPC \) is the marginal propensity to consume. Here, \( MPC = 0.75 \).

Step 2: Calculate the multiplier

Substitute \( MPC = 0.75 \) into the formula: \( k=\frac{1}{1 - 0.75}=\frac{1}{0.25} = 4 \).

Step 3: Find the change in GDP

The change in investment \( \Delta I=\$100 \). The change in GDP \( \Delta Y=k\times\Delta I \). Substitute \( k = 4 \) and \( \Delta I=\$100 \): \( \Delta Y=4\times100=\$400 \).

Step 1: Recall the formula for MPS

The marginal propensity to save \( MPS=\frac{\Delta S}{\Delta Y} \), where \( \Delta S \) is the change in savings and \( \Delta Y \) is the change in disposable income.

Step 2: Calculate \( \Delta S \) and \( \Delta Y \)

From the table, \( \Delta S=2500 - 2000=\$500 \) and \( \Delta Y = 12000-10000=\$2000 \).

Step 3: Calculate MPS

Substitute into the formula: \( MPS=\frac{500}{2000}=0.25 \).

Step 1: Recall the formula for the spending multiplier

The spending multiplier \( k=\frac{1}{MPS} \) (or also \( k = \frac{1}{1 - MPC} \), and since \( MPC+MPS = 1 \), both formulas are equivalent). We found \( MPS = 0.25 \) in the previous sub - question.

Step 2: Calculate the multiplier

Substitute \( MPS = 0.25 \) into the formula: \( k=\frac{1}{0.25}=4 \).

Answer:

\$400

Problem 2 (Sub - question 1: What is the MPS?):