Question

Can anyone please explain how to work these questions??

Suppose that a $20 billion increase in disposable income (YD) leads to a $10 billion increase in consumption spending (C).
Instructions: Round your answers to 1 decimal place.

A. What is the MPC in this economy? $____

B. What is the size of the spending multiplier? _____

C. If, instead, consumption spending (C) increased by $12 billion due to the increase in disposable income (YD), what would be the size of the spending multiplier? _____

Assume for this economy that the spending multiplier is 4.
Instructions: Enter your answers as whole numbers.  

A. If consumer spending falls by $25 billion because of a decline in household wealth, and investment spending rises by $40 billion due to higher expected rates of return on investment, in what direction and by how much will the aggregate demand curve initially shift?

Leftward OR Rightward by $______Billion.

B. Given the spending multiplier stated above, in what direction and by how much will the aggregate demand curve eventually shift?

Leftward OR Rightward by $______Billion.

Answer 1

Q.1.A. If disposable income Y_D increases by $20 billion but consumption spending C increases by $10 billion , then, MPC = Increase in C/Increase in Y_D = 10/20 = 0.5

B. Spending multiplier = 1/(1-MPC) = 1/(1-0.5) = 1/0.5 = 2

C. If C increases by $12 billion due to $20 billion increase in Y_D , then, MPC = Increase in C/Increase in Y_D = 12/20 = 0.6

Here, spending multiplier = 1/(1-MPC) = 1/(1-0.6) = 1/0.4 = 2.5

Q.2.A. Fall in consumer spending decreases aggregate demand ,so, the aggregate demand curve must shift to the left. But, due to increase in investment, the aggregate demand rises and the aggregate demand curve will shift to the right . Now, as increase in investment is greater than the fall in consumption, initially, the net effect is rightward shift of the demand curve. Also, the aggregate demand curve will shift by $40 billion - $25 billion = $15 billion to the right.

B. Given, the value of spending multiplier = 4

Now, total decrease in consumption due to the effect of spending multiplier = $25 billion * 4 = $100 billion.

Thus, total decrease in consumption is greater than increase in investment, so, eventually the aggregate demand curve must shift leftward by ($100 billion - $40 billion) $60 billion.