Answer to Question #236914 in Macroeconomics for Cliff

Question

he 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

Solution:

The slope of AE curve is the MPC = 0.80

Multiplier = $\frac{1}{1 - MPC} = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5$

The Multiplier = 5

 

a.). $\triangle$ Exports = 2.25 – 1.75 = 0.5

$\triangle AE = \triangle Exports\times Multiplier = 0.5\times 5 = 2.5$

The equilibrium aggregate expenditure will increase by $2.5 trillion dollars.

 

b.). $\triangle$ G = 1.8 – 2.0 = -0.2

$\triangle AE = \triangle G\times Multiplier = -0.2\times 5 = -1$

The equilibrium aggregate expenditure will decrease by $1 trillion dollars.

 

c.). $\triangle$ I= 2.3 – 1.2 = 1.1

$\triangle AE = \triangle I\times Multiplier = 1.1\times 5 = 5.5$

The equilibrium aggregate expenditure will increase by $5.5 trillion dollars.