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ECO100Y5 Chapter Notes - Chapter 11: Consumption Function, Keynesian Cross, Inventory Investment

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Economics
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ECO100Y5
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Michael H O

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Document Summary

The total change in aggregate output is a multiple of the initial change in investment spending. Any autonomous change in aggregate expenditure, a change in spending that is not caused by a change in real gdp, generates the same chain reaction. The total size of the change in real gdp depends on the size of the multiplier. Assuming that there are no taxes and no trade, the multiplier is equal to 1/(1- Mpc), where mpc is the marginal propensity to consume. The total change in real gdp, y, is equal to 1/(1-mpc) x ae0: the marginal propensity to consumer, or mpc, is the increase in consumer spending when disposable income rises by . Mpc is a positive fraction less than 1, ie. , 0 < Mpc < 1: mpc=( consumer spending / disposable income, expenditure multiplier ratio: total change in real gdp due to an autonomous change in aggregate spending and the size of autonomous change in aggregate spending.

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Related Questions

Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastland. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

Incremental Total change change Rounds in GDP in GDP 1 C = $40 billion ? 2 MPC — C = ? ? 3 MPC — MPC — C = ? ? 4 MPC — MPC — MPC — C = ? ? . . . . . . . . .

Total change in GDP (1/(1 MPC)) C ? Eastlandia Incremental Total change change Rounds in GDP in GDP 1 C = $40 billion ? 2 MPC — C = ? ? 3 MPC — MPC — C = ? ? 4 MPC — MPC — MPC — C = ? ? . . . . . . . . . Total change (1/(1 MPC)) C?

The ratio of the change in gdp to an initial change in aggregate spending is the:

a. spending multiplier. 

b. permanent income rate. 

c. marginal expenditure rate.

d. marginal propensity to consume 

Calculate the government-taxation multiplier for each marginal propensity to consume. Instructions: Round your answers to two decimal places.

a. The marginal propensity to consume (MPC) = 0.2, and the government spending multiplier is 1.25. The taxation multiplier is ?.

b. The marginal propensity to consume (MPC) = 0.5, and the government spending multiplier is 2.00. The taxation multiplier is ?.

c. The marginal propensity to consume (MPC) = 0.8, and the government spending multiplier is 5.00. The taxation multiplier is ?.

 

d. What do your results imply about the relative strength of changes in government spending versus changes in taxation for fiscal policy, all else equal?

i.   Changes in government spending will have an indeterminate effect on GDP and income compared to changes in taxes.

ii.  Changes in government spending will have a bigger effect on GDP and income than will changes in taxes.

iii. Changes in government spending will have an equal effect on GDP and income compared to changes in taxes.

iv. Changes in government spending will have a smaller effect on GDP and income than will changes in taxes.