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

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!)