91Ó°ÊÓ

At various times in the past-the early $1980$ s, early $1990$ s, early $2000$ s, and late $2000$ s-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 early $1980$ s, early$1990$ s, and early $2000$ s, 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-$2000$s 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.

Evaluate why autonomous changes in total planned expenditures have a multiplier effect on equilibrium real GDP

Step by step solution

01

Evaluate to calculate multiplier

Formula to calculate multiplier:

Multiplier $=\frac{1}{1−MPC}$

Where,

Marginal Propensity to Consume is represented by MPC.

Calculate Multiplier when Marginal Propensity to Save MPS $=0.25:$

Multiplier $=\frac{1}{1−MPC}$

$=\frac{1}{1−MPC}\left(\begin{array}{l}âˆ\mu MPC+MPS=1\\ MPC=1−MPS\end{array}\right)$

$=\frac{1}{1−(1−MPS)}$

localid="1651510049200" $=\frac{1}{1−1+MPS}$

$=\frac{1}{MPS}$

$=\frac{1}{0.25}$

Multiplier $=4$

Therefore, multiplier is$4$

02

Marginal propensity to Consume 

Multiplier is calculated when the marginal propensity to consume MPC is high. $=\frac{5}{6}$:

Multiplier $=\frac{1}{1-MPC}$

$=\frac{1}{1-\left({\displaystyle \frac{5}{6}}\right)}$

$=\frac{1}{\left({\displaystyle \frac{6-5}{6}}\right)}$

$=\frac{1}{\left({\displaystyle \frac{1}{6}}\right)}$

$=\frac{1}{1}×\frac{6}{1}$

$=\frac{6}{1}$

Multiplier $=6$

Therefore, multiplier is $6$

03

Marginal Propensity to save

Calculate Multiplier when Marginal Propensity to Save MPS $=0.125:$

Multiplier $=\frac{1}{1-MPC}$

$=\frac{1}{1−MPC}\left(\begin{array}{l}âˆ\mu MPC+MPS=1\\ MPC=1−MPS\end{array}\right)$

$=\frac{1}{1−\left(1-MPS\right)}$

$=\frac{1}{1−1+MPS}$

$=\frac{1}{MPS}$

$=\frac{1}{0.125}$

Multiplier $=8$

Therefore, multiplier is$8$

04

Marginal Propensity to Consume 

Multiplier is calculated when the marginal propensity to consume MPC is high. $=\frac{6}{7}$:

Multiplier $=\frac{1}{1-MPC}$

$=\frac{1}{1-\left({\displaystyle \frac{6}{7}}\right)}$

$=\frac{1}{\left({\displaystyle \frac{7-6}{7}}\right)}$

$=\frac{1}{\left({\displaystyle \frac{1}{7}}\right)}$

$=\frac{1}{1}×\frac{7}{1}$

$=\frac{7}{1}$

Multiplier $=7$

Therefore, multiplier is $7$

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!