If the Bank of Canada purchases $500 million worth of bonds from the public in an open market operation, calculate
the change in quantity of money that will eventually result. Assume that the currency drain is 0.20, and that the desired reserve ratio is 0.10.
a) Define the marginal propensity to consume and explain its role in determining the size of the multiplier.
b) Explain how the size of the multiplier will change when one brings in the role of imports.
c) Using the concepts in parts (a) and (b) above, calculate the slope of the AE curve and the size of the multiplier if MPC = 0.80. Then, calculate the revised Slope of the AE curve and the multiplier when you know that the marginal propensity to import is 0.15 and the marginal tax rate (induced tax rate) is 0.2.
The change in money supply is $1500 million. a. The marginal propensity to consume (MPC) is defined as... View the full answer