The second ecnomy\'s MPC is 0.6. Therefore, its initial planned-expenditure func
ID: 1222272 • Letter: T
Question
The second ecnomy's MPC is 0.6. Therefore, its initial planned-expenditure function has a slope of 0.6 and passes through the point (100, 100). Now, suppose there is an increase of $40 billion in government purchases in each economy. Place a green line (triangle symbols) on each graph showing the new planned-expenditure function for each economy. Then place a red point (cross symbol) or each graph showing the new level of equilibrium income. In the first economy (with MPC = 0.5), the $40 billion increase in government purchases causes equilibrium income to increase by____________. In the second economy (with MPC = 0.6), the $40 billion increase in government purchases causes equilibrium income to increase by____________. Therefore, a higher MPC is associated with a____________multiplier. Now, confirm your graphical analysis algebraically using the formula for the government-purchases multiplier: Government-Purchases Multiplier = 1/1 - MPC For the first economy with an MPC of 0.5, the effect of the $40 billion increase in government purchases becomes the following: Using the same method, the multiplier for the second economy is____________.Explanation / Answer
$80
/(1-0.5)=1/0.5=2
2*40=80
$100
/(1-0.6)=1/0.4=2.5
2.5*40=100
higher
1/(1-0.5)
1/0.5
2
1/(1-0.6)
1/0.4
2.5