When aggregate expenditure increases, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in aggregate expenditure of $40 billion and the marginal propensity to consume is 0.75
There is a multiple expansion of income and real GDP because one person's spending becomes another
person's income who, in turn, spends and creates more income. The initial increase in aggregate
expenditure will create $40 billion in additional income. Resource owners will spend 75 percent (MPC =
0.75) of their gain in income or $30 billion. This creates $30 billion in income of which resource owners
will spend $22.5 billion. In turn, this $22.5 billion in new income creates $16.88 billion in new spending. In
the next round $16.88 billion in new income will create $12.66 billion in new spending.
You might also like to view...
The characteristic most closely associated with oligopoly is
A. a few large producers. B. easy entry into the industry. C. product standardization. D. no control over price.
The typical average cost curve
A. continually declines as output increases. B. is horizontal. C. continually increases as output increases. D. first declines to a minimum and then increases as output increases.
Comparative advantage is the ability of a country to produce a good at a ________ opportunity cost relative to other countries
a. higher b. lower c. equivalent d. none of the above
A perfectly competitive producer faces a demand curve for its own product that is
A. horizontal. B. upward sloping. C. vertical. D. downward sloping.