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Conditions for a Multiplier Less Than One
Although the basic multiplier model yields a value greater than one, this is not always the case in more complex frameworks. The model can be extended to include scenarios where the initial, direct impact of a fiscal stimulus on output is less than one-for-one. This diminished direct effect can lead to an overall multiplier that is less than one.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Multiplier Process
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Conditions for a Multiplier Less Than One
Fall in Business Confidence as a Trigger for the Multiplier Process
An economy experiences a sudden, one-time increase of $50 billion in autonomous investment spending on new factories. Assuming no other changes, what is the most likely ultimate effect on the economy's total output as described by the multiplier model?
Comparing Economic Responses to a Spending Shock
A wave of pessimism about the future of the economy causes firms to significantly reduce their spending on new machinery and buildings. According to the logic of the multiplier model, arrange the following events in the chronological sequence that would follow this initial shock.
Analysis of the Economic Amplification Effect
Explaining the Amplification of Spending
According to the multiplier model, if a government reduces its spending by $100 million to balance its budget, the total output of the economy will also decrease by exactly $100 million, as the reduction in demand is directly offset by the decrease in government expenditure.
Match each stage of the economic process described below with its correct description, illustrating how an initial change in spending is amplified.
In a simplified economy, a firm spends an initial $1,000 on new machinery. This $1,000 becomes income for the machinery's producers. If these producers, in turn, spend 80% of this new income on other goods and services, this second round of spending will add an additional $____ to the economy's total demand.
Evaluating Economic Stimulus Policies
An economy experiences a $10 billion increase in autonomous investment. In which of the following scenarios would this initial change in spending lead to the largest total increase in national output?
Demand-Determined Output Assumption of the Multiplier Model
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Crowding Out of Private Spending by Government Expenditure
Fiscal Stimulus Impact Analysis
A government increases its spending on a new infrastructure project by $100 billion. However, after all subsequent economic effects are measured, the nation's total output is found to have increased by only $75 billion. Which of the following provides the most direct explanation for why the overall economic impact was smaller than the initial government expenditure?
Explaining a Sub-One Multiplier
Evaluating the Effectiveness of Fiscal Stimulus
A government enacts a $100 billion spending package. If this action simultaneously causes households to increase their savings by $30 billion and businesses to reduce their planned investments by $40 billion in direct response to the government's policy, the overall multiplier effect on the economy must still be greater than one.
A government initiates a $100 billion spending program on public infrastructure. For each of the following independent economic reactions that could occur, match it to its most likely consequence for the final change in the nation's total output.
A government increases its spending by $50 billion. In direct response to this policy, households increase their savings by $10 billion (reducing their consumption by the same amount), and firms reduce their planned investment by $20 billion. The initial, direct change in aggregate spending, before any subsequent rounds of spending occur, is a net increase of $____ billion.
A government announces a new $100 billion spending program. However, this policy also triggers immediate offsetting reactions in the private sector. Arrange the following events in the logical sequence that would lead to a final increase in total economic output of less than $100 billion.
A government increases its direct purchases of goods and services by $200 billion. Under which of the following independent scenarios is it certain that the nation's total economic output will ultimately increase by less than $200 billion?
Critiquing a Fiscal Policy Claim