Answer to Question #235237 in Macroeconomics for Sheehama Asser

Question

The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much does equilibrium aggregate expenditure increase if

a) exports increase from $1.75 trillion to $2.25 trillion. (8 marks)

b) government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion.

(6 marks)

c) investment increases from $1.2 trillion to $2.3 trillion. (6 marks)

Answer 1

Slope of AE curve = c = 0.8

Expenditure multiplier = k = 1/(1-c)

k = 1/(1-0.8)

k = 1/0.2

k = 5

(1) Change in exports = ΔX = $2.25 - $1.75 = $0.50 trillion

Change in aggregate expenditure = ΔAE

ΔAE/ΔX = k

ΔAE/0.5 = 5

ΔAE = 5 * 0.5

ΔAE = $2.5 trillion

Aggregate expenditure increases by $2.5 trillion.

(2) Change in government expenditure = ΔG = $1.8 - $2 = -$0.20 trillion

Change in aggregate expenditure = ΔAE

ΔAE/ΔG = k

ΔAE/-0.2 = 5

ΔAE = 5 * -0.2

ΔAE = -$1 trillion

Aggregate expenditure deceases by $1 trillion.

(3) Change in investment = ΔI = $2.3 - $1.2 = $1.1 trillion

Change in aggregate expenditure = ΔAE

ΔAE/ΔI = k

ΔAE/1.1= 5

ΔAE = 5 * 1.1

ΔAE = $5.5 trillion

Aggregate expenditure increases by $5.5 trillion.