An economy has a marginal propensity to consume of 0.5, and...

An economy has a marginal propensity to consume of $0.5,$ and $Y^{*},$ income-expenditure equilibrium GDP, equals $\$ 500$ billion. Given an autonomous increase in planned investment of $\$ 10$ billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase of planned investment spending of $\$ 10$ billion raises real GDP and $Y D$ by $\$ 10$ billion, leading to an increase in consumer spending of $\$ 5$ billion $(M P C \times$ change in disposable income) in row $2,$ raising real GDP and $Y D$ by a further $\$ 5$ billion. a. What is the total change in real GDP after the 10 rounds? What is the value of the multiplier? What would you expect the total change in $Y^{*}$ to be based on the multiplier formula? How do your answers to the first and third questions compare? b. Redo the table starting from round 2 , assuming the marginal propensity to consume is $0.75 .$ What is the total change in real GDP after 10 rounds? What is the value of the multiplier? As the marginal propensity to consume increases, what happens to the value of the multiplier?

An economy has a marginal propensity to consume of $0.5,$ and $Y^{*},$ income-expenditure equilibrium GDP, equals $\$ 500$ billion. Given an autonomous increase in planned investment of $\$ 10$ billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase of planned investment spending of $\$ 10$ billion raises real GDP and $Y D$ by $\$ 10$ billion, leading to an increase in consumer spending of $\$ 5$ billion $(M P C \times$ change in disposable income) in row $2,$ raising real GDP and $Y D$ by a further $\$ 5$ billion.
a. What is the total change in real GDP after the 10 rounds? What is the value of the multiplier? What would you expect the total change in $Y^{*}$ to be based on the multiplier formula? How do your answers to the first and third questions compare?
b. Redo the table starting from round 2 , assuming the marginal propensity to consume is $0.75 .$ What is the total change in real GDP after 10 rounds? What is the value of the multiplier? As the marginal propensity to consume increases, what happens to the value of the multiplier?

Key Concepts

Autonomous Spending

Autonomous spending is the component of total spending that does not depend on the current level of income. Examples include planned investment, government spending, or exports. It is the trigger for the multiplier process because its initial change sets off subsequent rounds of induced consumption.

Rounds of Spending

Rounds of spending refer to the successive cycles of spending induced by the initial change in autonomous spending. Each round consists of additional consumption spending generated from the income received in the previous round, with the size of each subsequent round determined by the MPC. This concept illustrates how the economy can experience an amplified change in total output from a modest initial stimulus.

Marginal Propensity to Consume (MPC)

The MPC is a measure of how much additional consumption occurs from an extra dollar of disposable income. It represents the proportion of income that households are likely to spend rather than save, and it is a key factor in determining the strength of the multiplier effect in economic models.

Multiplier Effect

The multiplier effect refers to the process by which an initial change in autonomous spending (such as investment or government expenditure) leads to a larger change in overall economic output. It is calculated as 1 divided by (1 - MPC) and illustrates how spending circulates through the economy, generating additional rounds of income and expenditure.

Transcript

00:01 So an economy has a marginal propensity to consume of 0 .5 and why the income expenditure equilibrium gdp is equal to 500 billion.

00:20 And we're giving an autonomous increase in planned investment of 10 billion.

00:29 And it shows the rounds of increase spending that take place by completing the accompanying a company table were given.

00:36 And the table basically only shows the change in c, the change in real gdp and is not given, and the change in yd is not given, but giving the bounds.

00:50 So the first and second rules are fielding for you.

00:52 In the first row, the increase of planned investment spending of $10 billion raises the real gdp and the yd by $10 ,000, leading to an increase in consumer spending of $5 billion, which is an mpc multiplied by a change in disposable income.

01:06 Income in row 2 and that raises the real gdp and the yd by further 5 million.

01:12 So the first question was to calculate the total change in real gdp after 10 rounds and the value of the multiplier and what you expect the total change in y to be based on the multiplier formula and how your answers to the first and total questions compare.

01:28 So before we start that question, we're going to be filling the table first.

01:34 So we're giving the marginal propensity to consume and the gdp is equal to 500 billion and why an income equilibrium so the autonomous increase in planned investments is 500 is 10 billion rather and in ro 1 the increase of planned investment spending is 10 billion so in ro 1 the increase of planned investments spending is 10 billion is 10 and the real gdp and the real gdp and yd is 10 billion to while in row 2 the um leading to an increase the consumer spending and this is 5 billion and the real gdp and yd is 5 billion so now we're going to be completing the table on based on what you're giving so the rounds will be here and we have 10 rounds and then we have the change in c and then the change in the real gdp and the 6 consumption and the change in yd so this goes from 1 to 10 1 2 3 4 5 6 7 8 9 10 so basically filling in the table and these are in billions by the way we're going to have 5 2 .5 1 .25 0 .625 0 .3185 0 .15 .0 .15 .0 .0778, 0 .0 .0 .0339 and 0 .0195.

04:47 If i'll change in real gdp, we're going to have 5105, 2 .5, 1 .25, 0 .039 .0 .0 .0 .0 .0 .5...

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