The multiplier effect of change in government purchases

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The multiplier effect of a change in government purchases

Consider a hypothetical closed economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50.

The marginal propensity to consume (MPC) for this economy is _________, and the multiplier for this economy is __________.

Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to

This decreases income yet again, causing a second change in consumption equal to

The total change in demand resulting from the initial change in government spending is

Reference no: EM13892031

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