Author Question: Answer the following questions: a. If aggregate expenditures falls by 5 million, and the MPC is ... (Read 44 times)

newyorker26 · **on:** Jun 30, 2018

Answer the following questions:
a. If aggregate expenditures falls by 5 million, and the MPC is 0.80, explain the process that will drive the economy to a new equilibrium level.
b. What will be the final result of this initial change?

Question 2

Which of the following appears on the asset side of a bank's balance sheet?
a. Excess reserves.
b. Loans.
c. Required reserves.
d. All of the above.

amandanbreshears · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

a. The initial 5 million decrease in aggregate expenditures will cause real GDP to fall by 5 million. People will respond to this change by cutting consumption spending by 4 million (+5 million 0.80). This second decrease in aggregate expenditures will cause real GDP to fall by 4 million, triggering an additional 3.2 million (+4 million .80) decrease in consumption spending. This will cause successive cuts in income and consumption, each smaller than the previous one.
b. The spending multiplier in this case is 1/(1 0.80) = 5 . This means that real GDP will fall by 5 for every 1 initial change in aggregate expenditures. Therefore, the cumulative effect is that real GDP will fall by 25 million (= 5 million 5).

Answer to Question 2

d