Question

Show the effect of a $500 increase in government spending. Instructions: Click and drag on the expenditure line to move it to the correct position given the $500 increase in government spending.

a) Insert a graph here
b) Modify the equation accordingly
c) Adjust the parameters in the model
d) None of the above

Answer 1

In response to a $500 increase in government spending, the expenditure line on a graph is shifted upward to reflect the new level of spending, demonstrating the multiplier effect in macroeconomics.

Step-by-step explanation:

The student's question pertains to the impact of an increase in government spending on the economy. When government spending increases, it shifts the expenditure line upward, reflecting a higher level of spending at each level of real GDP. To illustrate, let's assume an initial government spending level of $1,300. If spending increases by $500, the new spending level becomes $1,800.

• Determine the multiplier using the formula (Multiplier = 1 / (1 - MPC) where MPC is the marginal propensity to consume).
• Calculate the increase in equilibrium output according to the multiplier equation.

Thus, the expenditure line on a graph would be shifted upward by the amount of the increase in government spending, demonstrating the use of the multiplier effect in macroeconomics.