Change in Investment (ΔI) as an Autonomous Demand Shock

Formula for Change in Output from an Autonomous Spending Shock

Impact of an Autonomous Spending Shock

In a closed economy with no government sector, the marginal propensity to consume is 0.8. If autonomous investment spending increases by $100 billion, what will be the total change in the equilibrium level of output?

Calculating and Explaining the Multiplier Effect

An economy experiences a $100 million increase in autonomous investment spending. The marginal propensity to consume is 0.75. Arrange the following events to illustrate the first few rounds of the multiplier effect in the correct chronological order.

In an economy where households tend to save a larger portion of any additional income they receive, an initial increase in autonomous investment spending will lead to a larger overall increase in equilibrium output compared to an economy where households save less.

An economy is characterized by a marginal propensity to consume of 0.75. An external event causes autonomous investment to increase by $100 billion. Match each term on the left with its correct corresponding value or description on the right.

Evaluating Economic Stimulus Policies

In a simple closed economy with no government, the marginal propensity to consume is 0.6. If autonomous investment decreases by $50 billion, the total change in equilibrium output will be a decrease of $____ billion.

Two closed economies, A and B, have no government sector. In Economy A, households spend 90 cents of every extra dollar they earn. In Economy B, households spend 60 cents of every extra dollar they earn. If both economies experience an identical, positive shock to autonomous investment spending, which of the following statements accurately describes the resulting change in their respective equilibrium outputs?

In a closed economy with no government, a $20 billion decrease in autonomous investment leads to a $100 billion decrease in total equilibrium output. What is the marginal propensity to consume in this economy?

Formula for Change in Output from an Autonomous Spending Shock

An economy's equilibrium output is initially described by the equation Y₁ = k(c₀ + I). After an increase in investment (ΔI), the new equilibrium is Y₂ = k(c₀ + I + ΔI). To find the total change in output (ΔY), we calculate ΔY = Y₂ - Y₁. Which algebraic step is the most direct and crucial for simplifying the resulting expression, ΔY = k(c₀ + I + ΔI) - k(c₀ + I), to its final, most concise form?

Arrange the following algebraic expressions in the correct logical sequence to derive the relationship between a change in investment (ΔI) and the resulting change in equilibrium output (ΔY).

Analysis of the Output Change Derivation

In the process of determining the total change in equilibrium output (ΔY) following a change in investment (ΔI), the algebraic derivation starts with ΔY = k(c₀ + I + ΔI) - k(c₀ + I) and simplifies to ΔY = k * ΔI. What is the key economic insight revealed by the fact that the k(c₀ + I) terms cancel out during this simplification?