Answer the following questions: a. If aggregate expenditures ...

[newyorker26]

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]

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

[newyorker26]

YES! Correct, THANKS for helping me on my review

[olderstudent]

Thanks for the timely response, appreciate it