Question

The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

          The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers.
a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

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The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about 700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers.
a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the700 billion in payments.

Added by Todd W.

Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Andrew Davis

11/18/2022

Step 1

5 and the government is providing $700 billion in payments, we can calculate the initial change in aggregate consumer spending as follows: Initial change = MPC * Government payments Initial change = 0.5 * $700 billion Initial change = $350 billion Show more…

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The U.S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

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Transcript

00:01 So here we know two things.

00:03 First of all, right, we're going to send consumers 700 billion.

00:11 Ooh, that was not a great dollar sign.

00:14 So we're just, it's like you're just mailing them checks for money, right? 700 billion.

00:19 And we also know that the marginal propensity to consume is 0 .5.

00:25 So let's try to track the changes through, right? assuming with that the marginal propensity is remember this is the change in consumption over the change in disposable income right it's that if you give people money how much will they spend right so you give 700 billion and that means they spend 0 .5 times 700 is equal to 350 billion on consumption right that's what the marginal propensity to consume is telling us half of it is is spent, right? so this would be the initial change, right? you give people 700 billion.

01:08 The marginal propensive to consume is 50%.

01:11 So they spend half of it.

01:12 They spend 350 billion on consumption.

01:15 But then, right, remember that y is equal to c plus i plus g plus nx.

01:22 So you increased consumption, which will increase output, right? so plus 350 billion in consumption.

01:29 Consumption means that you have plus 350 billion in output, right? the economy is growing.

01:36 But output also affects consumption, right? so plus 350 billion y implies that you are going to spend 0 .5 times 350 is equal to 175 billion on c.

01:57 And the idea is here, the government sent everyone a check, people went and spent them...

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