Question

What is the multiplier effect? how can spending reverberate both positively and negatively for the economy?...

What is the multiplier effect? how can spending reverberate both positively and negatively for the economy? Discuss this, making sure to mention the multiplier and out propensities to save and to spend

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Multiplier = 1/MPS = 1/(1-MPC)
MPS: Marginal propensity to save
MPC: Marginal propensity to consume

According to the multiplier effect, a change in disposable income, investment, government spending, net exports etc, causes a change in output by a multiple of the initial change.

Positive for economy
When economy is in recession, and governmetn reduces taxes, the disposable income rises and consumers spend more. Which leads to greater rise in income than the initial reduction in taxes.

Negative for Economy
Suppose investment rises which leads to lower aggregate demand. As a result, total output falls more than the initial reduction in investment.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The multiplier effect Consider a hypothetical economy where there are no taxes and no foreign trade,...
The multiplier effect Consider a hypothetical economy where there are no taxes and no foreign trade, and households spend $0.90 of each additional dollar they earn and save the remaining $0.10. The marginal propensity to consume (MPC) for this economy is ; the marginal propensity to save (MPS) for this economy is ; and the multiplier for this economy is Suppose investment spending in this economy decreases by $150 billion. The decrease in investment will lead to a decrease in...
If investment spending increases by $80 mill., the multiplier effect suggests that the Aggregate Demand curve...
If investment spending increases by $80 mill., the multiplier effect suggests that the Aggregate Demand curve will shift out by more than $80 mill., because: Question 3 options: when some builders see that others are building, they want to build, too. when investments increase, the government will increase spending to support them. an increase in investment spending will lead to income for workers who will spend part of it, so spending leads to income which leads to more spending. an...
How does histone acetylation affect transcription (positively or negatively)? What enzymes acetylate histones and what enzymes...
How does histone acetylation affect transcription (positively or negatively)? What enzymes acetylate histones and what enzymes deacetylate?
Biological macromolecules such as proteins may be positively, negatively, or neutrally charged depending on what amino...
Biological macromolecules such as proteins may be positively, negatively, or neutrally charged depending on what amino acids are present. Some parts of a macromolecule may be positively charged while others are negatively charged, and this can affect the conformation – the shape of the macromolecule. Changes in the conformation may affect the function of a macromolecule. Two charged macromolecules (labelled 1 and 2) have charges q1 =+3.20 × 10-19 C and q2 =+12.8 × 10-19 C. They are separated by...
1. Holding everything else constant, the multiplier effect of a $100 tax cut : a)is the...
1. Holding everything else constant, the multiplier effect of a $100 tax cut : a)is the same as the multiplier effect of a $100 increase in G. b)is smaller than the multiplier effect of a $100 increase in G. c)is larger than the multiplier effect of a $100 increase in G. d)may be smaller than, larger than, or equal to the multiplier effect of a $100 increase in G. 2. When the government borrows funds in financial markets to pay...
Suppose that the MPC is 0.75 and that this economy has lump sum taxes. 1. What...
Suppose that the MPC is 0.75 and that this economy has lump sum taxes. 1. What is the spending multiplier? 2. What is the tax multiplier? 3. What will happen to GDP if taxes increase by 1,200? 4. What would to GDP if spending decreases by 1,200? 5. What decreases in taxes would have the same effect on the economy as the increase in G in (d)? 6. Suppose that both income and taxes increase by 2,000. What is the...
A real Keynesian model of a mixed economy with a marginal propensity to consume equal to...
A real Keynesian model of a mixed economy with a marginal propensity to consume equal to .9 produces an equilibrium level of $2400 billion that is $600 billion below a full employment level of output. A) What change in government spending would bring about full employment? Be sure to calculate the government spending multiplier. B) The resulting increase in real output have driven up real interests rates from 3% to 4% and those higher real interest rates reduced investment by...
The multiplier will increase if the MPC Increases Decreases Stays the same Depends on what MPC...
The multiplier will increase if the MPC Increases Decreases Stays the same Depends on what MPC and what multiplier you are talking about. "If the government had an annually balanced budget, so G=T every year, we would expect" The economy to be more stable Injections and leakages to be easier to set equal The economy to be less stable Injections to usually be greater than leakages The multiplier effect: Lessens upswings and downswings in business activity Reduces the MPC Magnifies...
1-The spending multiplier is used in determining the economic impact on a local economy. a-True b-False...
1-The spending multiplier is used in determining the economic impact on a local economy. a-True b-False 2-A change in the price of hamburgers will change the supply of hot dogs. a- True b- False 3-Tacit cooperation is a concerted action by rival firms that raise profits of both without direct communication or collusion. A- True B- False 4-What company did fill Mickelson get investigated for in regards to insider trading? A. Amazon B. Microsoft C. Apple D. Dean Foods 5-If...
What is the "crowding out" effect? How does it affect the economy? (Thorough explanation)
What is the "crowding out" effect? How does it affect the economy? (Thorough explanation)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT