Check Your Understanding 26-1 1. Explain why a decline in investment spending caused by a change in business expectations leads to a fall in consumer spending. 2. What is the multiplier if the marginal propensity to consume is 0.5? What is it if MPC is 0.8? 3. As a percentage of GDP, savings accounts for a larger share of the economy in the country of Scania compared to the country of Amerigo. Which country is likely to have the larger multiplier? Explain. Solutions appear at back of book.
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It is calculated as 1 divided by the marginal propensity to save (MPS), which is equal to 1 minus the marginal propensity to consume (MPC). If the MPC is 0.5, then the MPS is 0.5 as well (since MPS = 1 - MPC). Show more…
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1) Assume that taxes depend on income. The MPC is 0.8 and t is 0.25. The government spending multiplier is A) 1.67. B) 2.5. C) 5. D) 10 2) If taxes depend on income and the MPC is 0.6 and t is 0.3, the tax multiplier is A) -1.03. B) -1.72. C) -2.0. D) -2.24 3) Assume that taxes depend on income. The MPC is 0.8 and t is 0.4. If government purchases increase by $100 billion, the equilibrium level of output will increase by A) $16.7 billion. B) $57.5 billion. C) $192.31 billion. D) $215.9 billion.
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If the multiplier is 5, then the MPC is 0.05 0.5 0.6 0.8 In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is $151.25. $166.75. $170.20. $175.00.
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