Answer to Question #238593 in Macroeconomics for KHALLY

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 = MPC = 0.8

Expenditure multiplier = $\frac{1}{1-mpc}$ = $\frac{1}{1-0.8}$ = 5

Therefore expenditure multiplier is 0.5

a. Change in exports = 2.25 - 1.75 = 0.5 trillion

As per the multiplier formula,

$\frac{change in AE}{change in exports}$ = 5

Therefore, change in AE = Change in exports $\times$ 5 = (0.5)$\times$ 5 = $2.5 trillion

Therefore, AE will increase by $2.5 trillion.

 

b. Change in G = 1.8 - 2 = -0.2 trillion

According to the multiplier formula,

$\frac{Change in AE}{change in G} = 5$

Therefore, change in AE = Change in G $\times$ 5 = (-0.2) $\times$ 5 = $-1 trillion

Therefore, AE will decrease by $1 trillion.

 

c. Change in I = 2.3 - 1.2 = 1.1 trillion

According to the multiplier formula,

$\frac{change in AE}{change in I} = 5$

Therefore, change in AE = Change in I$\times$ 5 = (1.1)$\times$ 5 = $5.5 trillion

Therefore, AE will increase by $5.5 trillion.