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Chapter 12: Q. 11 (page 278)

In an economy in which the multiplier has a value of 3, the price level has decreased from 115 to 110. As a consequence, there has been a movement along the aggregate demand curve from S18trillion in real GDP to 18.9 trillion in real GDP.

a. What is the marginal propensity to save?

b. What was the amount of the change in planned expenditures generated by the decline in the price level?

Short Answer

Expert verified

As a result, anticipated spending will increase in lockstep with real GDP growth, bringing total spending to 0.9The value of the dollar has plummeted by a trillion dollars as a result of the price reduction.

Step by step solution

01

IntroductionStep 1:  Economy's autonomous 

a)

The relationship between the change in autonomous real expenditure in the economy and the level of real GDP.

The amount saved out of a person's total income is known as the marginal propensity to save. The multiplier formula listed below will be used to compute the marginal propensity to save.

Multiplier=1MPS

Because the multiplier is set to three, MPS is calculated as follows:

3=1MPS

M P S =13

=0.34

As a result, the value of theMPSis0.34

02

The economy's pricing 

b)

The price level in the economy has reduced, which will increase people's purchasing power in the economy. The growth in AD coincides with the increase in GDP from 18 trillion to trillion dollars.

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Most popular questions from this chapter

Identify the primary determinants of planned investment

Assume that the multiplier in a country is equal to 4and that autonomous real consumption spending is\(1trillion. If current real GDP is\)18trillion, what is the current value of real consumption spending?

Take a look at Table 12-2 and consider the changes in planned real consumption and saving associated with an increase in real GDP from \(14.0 trillion to \)15.0 trillion to calculate the marginal propensity to consume.

At an initial point on the aggregate demand carve, the price level is100, and real GDP is\(18trillion. After the price level rises to110 , however, there is an upward movement along the aggregate demand curve, and real GDP declines toSl4 trillion. If total planned spending declined by \)200 billion in response to the increase in the price level, what is the marginal propensity to consume in this economy?

At various times in the past-the early 1980s, early1990s, early 2000s, and late 2000s-business profit expectations plummeted, and firms cut back on their investment spending. The ratio of total investment spending to companies' aggregate profit flows decreased markedly. In each instance, real GDP declined, and the U.S. economy fell into recession. At the end of the recession intervals of the early1980s, early 1990s, and early 2000s, business profit expectations improved. Firms responded by boosting their investment spending, and both real GDP and the ratio of investment expenditures to firms' profits recovered fully. At the conclusion of the late-2000s recession, however, this ratio failed to return to its previous level. By the time you have completed this chapter, you will understand why the result during this current decade has been a sluggish improvement in real GDP and, hence, an unusually slow economic recovery.

Understand the relationship between total planned expenditures and the aggregate demand curve
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