Chapter 1. Chapter 9c (20c)

Step 1

Solved Problems

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You must read each slide, and complete any questions on the slide, in sequence.

Question

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The multiplier formula is 1 / (1 - MPC). This can also be written as 1 / MPS.

Step 2

Question

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The multiplier formula is 1 / (1 - MPC). If MPC = 0.8, 1 - MPC = 0.2, and MPS = 1 / 0.2 = 5.

Step 3

Question

Suppose the government decides to increase spending by $1000. If the multiplier = 5, by how much does equilibrium GDP increase? $lVB8SM18pr0vkihEZEIMqg==

Equilibrium GDP rises by more than the amount of initial spending—the multiplier effect. This is calculated by taking the multiplier times the amount of initial spending. Here, increase in equilibrium GDP = 5 × $1,000 = $5,000.

Step 4

Question

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The multiplier formula is 1 / (1 - MPC). If MPC = 0.667, 1 - MPC = 0.333, and spending multiplier = 1 / 0.333 = 3.

Step 5

Question

Suppose the government decides to decrease spending by $2,000. If the multiplier = 3, by how much does equilibrium GDP decrease? $tmwNN2cDh1O3HfalQfzddkQyT0QpE3Fo

Equilibrium GDP falls by more than the initial cut in spending. This is calculated by taking the multiplier times the initial spending cut. Here, decrease in equilibrium GDP = 3 × $2,000 = $6,000.