Simple multiplier = 1/1-z where z = mpc (1-t)-m Economy A: z = (0.84)(0.85)-0.19 = 0.524 simple multiplier = 2.1 Economy B: 1.46 Economy C: 3.04 Economy D: 1.34 Economy E: 1.6 b. Which economy would experience the largest swings in real GDP in response to a given AD shock? Which would experience the smallest swings? Simple multiplier tells us what the change in Y will be given the change in A and it is assuming that the AS curve is flat -Economy C would have the largest swing because the AD curve will shift more when the simple multiplier is larger -Economy D will have the smallest swings c. Explain why the change in real GDP in response to an AD shock would not be solely determined by the simple multiplier for each of these economies. -When the AS curve is steeper, the smaller the change in Y for the AD curve d. Compare Economies A and B and explain how the tax-and-transfer system provides greater automatic stabilization in one of the two economies. B had a greater tax rate smaller simple multiplier and it has a greater automatic stabilization than in Economy A.
(only mention tax rate b/c you don’t know anything about the transfer payments) e. Explain how the slope of the AS curve would affect the short-run change in real GDP in response to an AD shock. -the steeper the AS curve, the smaller the change in Y