Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars. Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs. What type of macroeconomic equilibrium does this economy reflect? Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase? Does the increase in investment expenditures from part C result in a full employment equilibrium? Why? Graphically show the effects from part C in our Aggregate Expenditure Model and Aggregate Supply-Aggregate Demand Model. ABCDEFReal GDPY0.005.0010.0015.0020.0025.00ConsumptionExpenditureC1.004.007.0010.0013.0016.00InvestmentI2.002.002.002.002.002.00GovernmentExpenditureG1.501.501.501.501.501.50IExportsX1.001.001.001.001.001.00ImportsM0.501.001.502.002.503.00AggregateExpendituresAE5.007.5010.0012.5015.0017.50

Aggregate demand is the total demand for goods and services in an economy. It represents AD=C+I+G+X-M In the long run economy always remains at the potential level. Given information Potential GDP=$15 T Given table Part a) On the X-axis GDP is measured and on the Y-axis aggregate expenditure is measured. Short-run equilibrium is at the E point where real GDP is $10 T. On the X-axis GDP is measured and on the Y-axis price level is measured. Ad is the aggregate demand and AS is the short-run aggregate supply and LRAS is the long-run aggregate supply. Short-run equilibrium is at the point where AD=AS and at this point real GDP is $10 T. Part b) From the above table AE=C+I+G+X-M For short-run equilibrium Real GDP=AE At the equilibrium point, AE=$10T The economy is in equilibrium before reaching the potential level. Therefore, it is a short-run equilibrium. Part c) Given multiplier value=2 Change in Y=Multiplier*change in investment Change in Y=2*2.5 Change in Y=$5T Now new AE=10+5=$15T---- It shows that economy is reached at full capacity. Part c) After the increase in the investment AE will shift up to AE1 and a new equilibrium at point E1 which shows the long-run full capacity equilibrium point. Part d) After the increase in the investment AD will shift up to AD1 and a new equilibrium at point E1 which shows the long-run full capacity equilibrium point where GDP=$15T

Answered: Assume the Potential GDP is $15…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars.

Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs.

What type of macroeconomic equilibrium does this economy reflect?

Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase?

Does the increase in investment expenditures from part C result in a full

employment equilibrium? Why?

Graphically show the effects from part C in our Aggregate Expenditure

Model and Aggregate Supply-Aggregate Demand Model.

A
B
C
D
EF
Real GDP
Y
0.00
5.00
10.00
15.00
20.00
25.00
Consumption
Expenditure
C
1.00
4.00
7.00
10.00
13.00
16.00
Investment
I
2.00
2.00
2.00
2.00
2.00
2.00
Government
Expenditure
G
1.50
1.50
1.50
1.50
1.50
1.50
I
Exports
X
1.00
1.00
1.00
1.00
1.00
1.00
Imports
M
0.50
1.00
1.50
2.00
2.50
3.00
Aggregate
Expenditures
AE
5.00
7.50
10.00
12.50
15.00
17.50

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