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Author Question: In the United States economy, what is the basic measure of money? A) wealth B) disposable income ... (Read 57 times)

wrbasek0

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on: Jun 30, 2018
In the United States economy, what is the basic measure of money?
 
  A) wealth B) disposable income C) M1 D) commodities

Question 2

Explain the logic of the multiplier effect.
 
  What will be an ideal response?

Question 3

In the Keynesian model with government and the foreign sector added, what are the components of spending? Which of these components are autonomous and which are not? How is the equilibrium found?
 
  When the economy is not at an equilibrium, what adjustments are made?


mjbamaung

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Reply #1 on: Jun 30, 2018
Answer to Question 1

C

Answer to Question 2

The idea of the multiplier effect is that a change in autonomous spending leads to a greater change in equilibrium income. For example, suppose there is a 10 million initial increase in investment spending. This additional demand will initially increase output, income, and aggregate demand by 10 million. If we assume the MPC = 0.8, the 10 million in additional income will lead to 8 million in increased consumer spending (10 million  the MPC of 0.8). With this 8 million increase in consumer demand, output, income, and aggregate demand will increase by another 8 million. This will increase consumer spending by an additional 6.4 million (8 million  0.8). This increased demand will increase output, income, and aggregate demand by 6.4 million, generating further increases in consumer spending of 5.12 million. As this process continues over time, total spending will continue to increase, but in diminishing amounts. If all the spending from the (infinite) rounds is added up, the initial 10 million increase in investment spending will generate a total increase in equilibrium income of 50 million. In this case, the multiplier is 5 (10 million  5 = 50 million). (The value of the multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.

Answer to Question 3

There are four components to spendingconsumption, investment, government, and net exports. The last three are autonomous and consumption has an autonomous part to it. However, consumption is also a function of income. Equilibrium is found at the point at which total planned real spending (C + I + G + X) exactly equals real Gross Domestic Product (GDP). When the economy is not at an equilibrium, adjustments are made by unplanned inventory changes.


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