Explain what it means to say that .
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Textbook Solutions for Single Variable Calculus: Early Transcendentals,
Question
When money is spent on goods and services, those who receive the money also spend some of it. The people receiving some of the twice-spent money will spend some of that, and so on. Economists call this chain reaction the multiplier effect. In a hypothetical isolated community, the local government begins the process by spending dollars. Suppose that each recipient of spent money spends 100c% and saves 100c% of the money that he or she receives. The values c and s are called the marginal propensity to consume and the marginal propensity to save and, of course,
.
(a) Let be the total spending that has been generated after
transactions. Find an equation for
.
(b) Show that , where
. The number
is called the multiplier. What is the multiplier if the marginal propensity to consume is 80%?
Note: The federal government uses this principle to justify deficit spending. Banks use this principle to justify lending a large percentage of the money that they receive in deposits.
Solution
The first step in solving 11.2 problem number trying to solve the problem we have to refer to the textbook question: When money is spent on goods and services, those who receive the money also spend some of it. The people receiving some of the twice-spent money will spend some of that, and so on. Economists call this chain reaction the multiplier effect. In a hypothetical isolated community, the local government begins the process by spending dollars. Suppose that each recipient of spent money spends 100c% and saves 100c% of the money that he or she receives. The values c and s are called the marginal propensity to consume and the marginal propensity to save and, of course, .(a) Let be the total spending that has been generated after transactions. Find an equation for .(b) Show that , where . The number is called the multiplier. What is the multiplier if the marginal propensity to consume is 80%? Note: The federal government uses this principle to justify deficit spending. Banks use this principle to justify lending a large percentage of the money that they receive in deposits.
From the textbook chapter Series you will find a few key concepts needed to solve this.
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