AP Macroeconomics Combining Changes in Spending/Taxes, the Multiplier & Changes in AD

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28 Οκτ 2013 (πριν από 4 χρόνια και 15 μέρες)

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AP Macroeconomics

Combining
Changes in Spending/Taxes
, the Multiplier & Changes in AD


Directions: For each of the following problems determine the value of the multiplier & the
dollar value of the associated change in aggregate demand.


1.

Assume that
people will spend $0.90 of every extra dollar they earn. Further
assume that the real interest rate decreases, and this causes gross private
investment to increase by $50 billion. Determine the change in aggregate
demand.

(show the changes
mathematically &

graphically)

Answer:

MPC=.9

MPS=.1

Multiplier= 1/.1=10

Change in component of AD*Multiplier=Change in GDP

$50 billion*10=$500 billion






2.

If d
isposable income increases
by
$25,000
leading to a change in consumption
of
$12,500
,

then what would be the impa
ct of
a
$100 billion dollar increase in
g
overnment spending on aggregate demand? (show the changes
mathematically &
graphically)


Change in consumption/change in disposable income=MPC

12,500/25,000=.5 (one half)

MPC=.5

MPS=.5

1/.5=2

$100 billion*2=$200
billion







3.

If people save 5% of every extra dollar they earn, then what would be the impact
of $20 billion decrease in Net Exports on aggregate demand?


MPS=.05

1.05=20

-
$20 billion*20=
-
$400 billion

It’s negative because net exports decreased











4.

If MPC = 0.80, then calculate the effect of a $150 billion
increase

in federal
income taxes on aggregate demand.

TAX MULTIPLIER (ALERT!)


-
MPC/MPS

It’s negative because this is a tax increase


-
.8/.2=4


$150 billion*
-
4=a $600 billion decrease in GDP

(Bone

marrow sucking succubus!)