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Question #4 - Use the aggregate expenditures model to demonstrate the multiplier effect

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter9: The Keynesian Model In Action

Section: Chapter Questions

Problem 4SQP

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Question #4 - Use the aggregate expenditures model to demonstrate the multiplier effect.

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Pretend you are a member of the Council of Economic Advisers and are trying to persuade the members of the House Appropriations Committee to purchase $100 billion worth of new materials, in part to stimulate the economy. Explain to the members how the multiplier process will work.
Using the table below to answer the following questions. Assume all values represent trillions of dollars. Construct a graph of the Aggregate planned expenditure What is the equilibrium expenditure? Explain what happens at a real GDP of $4 trillion dollars. (Note the aggregate expenditures and the effects on inventories) What are your total autonomous expenditures? What is the marginal propensity to consume? Ignoring imports and income taxes, what is the multiplier? If investment increases by $1.5 trillion, what is the change in real GDP?
Economic s
The multiplier model: Consumption spending refers to ________ spending on goods and services.
Working with Multipliers Help with the following two exercises. 1. Assume the MPC is 0.70 and the government increases spending on public school programs by $20 billion. What is the value of the initial impact on real GDP? What is the value of the total impact on real GDP? 2. Assume the MPC is 0.75 and policymakers have targeted real GDP to decrease by $300 billion. By how much must taxes be increased to achieve this goal?
Respond to the question with a concise and accurate answer, along with a clear explanation and step-by-step solution, or risk receiving a downvote.
If the current value of GDP is $13.28 trillion and the government is planning to increase spending by $800 billion (all in one year), the percentage increase in GDP using the multiplier estimate of the first economist is percent. (Round your response to two decimal places.)
Government expenditures represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect in the economy.
PRICE LEVEL Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD₁). Suppose now that the government increases its purchases by $2 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD1. You can see the slope of AD₁ by selecting it on the following graph. 116 114 112 110 AD₁ 108 106 104 12 102 100 100 102 104 106 108 110 112 114 116 38.3¢ AD 3 (?)
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.
What is the definition for the multiplier process
Autonomous consumption = R100m Investment spending = R300m Government spending = R200 million Exports = R150 million Autonomous imports = R100 million Marginal propensity to consume =2/3 Tax rate = 1/10 Marginal propensity to import = 1/10 Yf = R2 150 million Autonomous spending = 650 million (already calculated) Calculate the size of the multiplier. Calculate the size of equilibrium level of income