To calculate the reduction in real government spending necessary to shift the AD curve leftward by $1.51 trillion, we need to use the MPC (marginal propensity to consume) formula.
The MPC is equal to the change in consumption divided by the change in disposable income (MPC = ΔC/ΔYd). Rearranging this formula, we can calculate the change in consumption by multiplying the MPC by the change in disposable income (ΔC = MPC * ΔYd).
Here, we know that the MPC is 0.80 and the change in disposable income is $1.51 trillion. So, the change in consumption is calculated as:
ΔC = 0.80 * $1.51 trillion
ΔC = $1.208 trillion
As the change in consumption is equal to the reduction in real government spending, the reduction in real government spending necessary to shift the AD curve leftward by $1.51 trillion is $1.208 trillion.
Suppose the government knows that the MPC is equal to 0.80 and that the amount of the horizontal distance that the AD curve had to be shifted directly leftward from point E1 was equal to $1.51 trillion. What is the reduction in real government spending required to have generated this shift?
Therefore, the reduction in real government spending necessary to shift the AD curve leftward by $1.51 trillion is $--- trillion.
3 answers
wrong answer. The decrease in real government spending induces a larger change in real GDP at an unchanged price level.
Apologies for the previous incorrect answer. To calculate the reduction in real government spending necessary to shift the AD curve leftward by $1.51 trillion, we need to use the multiplier effect.
The multiplier effect determines the total change in output (real GDP) resulting from a change in autonomous spending (such as government spending). The formula for the multiplier effect is 1/(1-MPC).
Given that the MPC is 0.80, we can calculate the multiplier as follows:
Multiplier = 1/(1-MPC) = 1/(1-0.80) = 1/(0.20) = 5
The multiplier of 5 means that for every $1 decrease in government spending, the total reduction in real GDP will be $5.
To find the reduction in government spending that generates a leftward shift of $1.51 trillion, we need to divide $1.51 trillion by the multiplier:
Reduction in government spending = $1.51 trillion / 5 = $0.302 trillion
Therefore, the reduction in real government spending required to shift the AD curve leftward by $1.51 trillion is $0.302 trillion.
The multiplier effect determines the total change in output (real GDP) resulting from a change in autonomous spending (such as government spending). The formula for the multiplier effect is 1/(1-MPC).
Given that the MPC is 0.80, we can calculate the multiplier as follows:
Multiplier = 1/(1-MPC) = 1/(1-0.80) = 1/(0.20) = 5
The multiplier of 5 means that for every $1 decrease in government spending, the total reduction in real GDP will be $5.
To find the reduction in government spending that generates a leftward shift of $1.51 trillion, we need to divide $1.51 trillion by the multiplier:
Reduction in government spending = $1.51 trillion / 5 = $0.302 trillion
Therefore, the reduction in real government spending required to shift the AD curve leftward by $1.51 trillion is $0.302 trillion.
5 answers