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Ruth Langmore has recently been given an inheritance, and she decides to take this of this money to invest in her new business venture wither her brother, Wyatt Langmore. The marginal propensity to consume is currently . a) What is the spending multiplier? Carry out the calculation to four decimal places. b) What is the change in equilibrium/aggregate income? c) What would happen to equilibrium/aggregate income if Ruth and Wyatt decided to consume or spend the instead of investing it? d) According to the lectures, what variables will be affected by the spending multiplier?

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a. The spending multiplier is 1.5625.

b. The change in equilibrium/aggregate income is $156,250.

c. If Ruth and Wyatt decided to consume or spend the $250,000 instead of investing it, equilibrium/aggregate income would decrease by $250,000.

d. The spending multiplier will affect aggregate demand, output, and employment.

Explanation:

The spending multiplier is the number by which a change in spending (either an increase or decrease) will affect equilibrium/aggregate income. In other words, the spending multiplier is the number that tells us how much aggregate income will change in response to a change in spending.

The spending multiplier is calculated by dividing 1 by the marginal propensity to save. The marginal propensity to save is the percentage of income that is saved rather than spent. So, if the marginal propensity to save is 0.65, that means that 65% of income is saved and 35% is spent. To calculate the spending multiplier, we take 1 and divide it by the marginal propensity to save. In this case, that would give us 1.5625.

This number tells us that for every dollar that is spent, aggregate income will increase by $1.56. So, if Ruth and Wyatt spend $250,000 on their new business venture, we would expect aggregate income to increase by $250,000 x 1.56, or $156,250.

Final Answer

The spending multiplier will affect aggregate demand, output, and employment because it tells us how much aggregate income will change in response to a change in spending. If spending goes up, then aggregate income will also go up (assuming the marginal propensity to save is less than 1). This will lead to an increase in aggregate demand, which will in turn lead to an increase in output and employment.

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