Question

In: Economics

Suppose the following list of events describes all of the economic activity resulting from an increase...

Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.88 and there are no taxes.


Step 0. The government spends $4500 on meat to host a very large dinner for foreign diplomats.

Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter.

Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends.

Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house.

Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary.

How much does the butcher earn for selling the meat? $ ________

How much does the candlestick maker spend on cake? $ _______

Solutions

Expert Solution

given that

The government has spend $4,500 on meat.

This meat was sold by butcher.

So, butcher has earned income of $4,500.

Tax rate = 0%


Income after tax = $4,500 - $0 = $4,500

MPC = 0.88

Amount spent on consumption = $4,500 * 0.88 = $3,960

The butcher has spent the amount on wedding cake.

So, this spending by butcher will become income of the baker.

Income of the baker = $3,960

Tax rate = 0%

Income after tax = $3,960 - $0 = $3,960

MPC = 0.88

Amount spent on consumption = $3,960 * 0.88 = $3,484.8

The baker has spent the amount on candlesticks.

So, this spending by baker will become income of the candlestick maker.

Income of the candlestick maker = $3,484.8

Tax rate = 0%

Income after tax =$3,484.8 - $0 = $3,484.8

MPC = 0.88

Amount spent on consumption = $3,484.8 * 0.88 = $3,066.624

Thus,

The candlestick maker earn $3,484.8 for selling the candlesticks.

The candlestick maker will spend $3,066.624 on building materials.

Rahul Sunny answered 2 years ago
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