When aggregate expenditure increases, why is there a multiple expansion of income and real GDP? Trace the multiplier effect through the first four rounds when there is an increase in aggregate expenditure of $40 billion and the marginal propensity to consume is 0.75
There is a multiple expansion of income and real GDP because one person's spending becomes another
person's income who, in turn, spends and creates more income. The initial increase in aggregate
expenditure will create $40 billion in additional income. Resource owners will spend 75 percent (MPC =
0.75) of their gain in income or $30 billion. This creates $30 billion in income of which resource owners
will spend $22.5 billion. In turn, this $22.5 billion in new income creates $16.88 billion in new spending. In
the next round $16.88 billion in new income will create $12.66 billion in new spending.
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Effective protection will be greater if, all else equal,
a. imported inputs are a small percentage of the final product b. tariffs on imported inputs are high c. tariffs on the final product are low d. quotas are added to tariffs on imported inputs e. none of the above
On which of the following does the neoclassical counter-revolution school most blame underdevelopment?
a. misguided government policies b. relatively rigid cultural traditions c. the legacy of colonialism d. unfair trade practices on the part of developed countries