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!)
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