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1. After several years of drought, farmers in central Illinois spend $50 million on irrigation equipment at a time when households do not spend 25% of additional income they receive. 2. The federal...

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1. After several years of drought, farmers in central Illinois spend $50 million on

irrigation equipment at a time when households do not spend 25% of

additional income they receive.

2. The federal government cuts spending on the purchase of new goods and

services by $35 billion at a time when households are not spending 40%

of additional income they receive.

3. Developers borrow $120 million for new home construction in a suburb of

Denver at a time when households are spending 70% of additional income

received.

4. Business spending for machinery and equipment falls by $6 billion after

predictions of a recession. Households spend only 50% of additional

income they receive, due to the predictions.

5. Imports increase by $25 million at the same time exports increase by

$20 Million. Households spend 60% of additional income received.

Answered Same Day Dec 22, 2021

Solution

David answered on Dec 22 2021
126 Votes
The following examples relate to the multiplier effect. In each of the following situations determine the direction and size of the change in total output and income that will result from each change in nonincome-determined spending.
1. After several years of drought, farmers in central Illinois spend $50 million on i
igation equipment at a time when households do not spend 25% of additional income they receive.
MPS= marginal propensity to save= .25
MPC = marginal propensity to consume = 1-.25 =0.75
multiplier = m= 1/[1-MPC]
m= change in income/ change in spending
m= 1/.25=4
so change in income = 4*50=200 million.
Income rises by 200 million
2. The...
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