### 5. Expenditure GapsThe following graph shows the planned expenditure line (AE) for an economy where current equilibrium income is $400 billion and full-employment income is $650 billion.#### Graph Explanation- **Vertical Axis (Y-axis):** - Labeled as "REAL EXPENDITURE (Billions of dollars)" - Scale ranges from 0 to 800 in increments of 100 billion dollars.- **Horizontal Axis (X-axis):** - Labeled as "INCOME (Billions of dollars)" - Scale ranges from 0 to 800 in increments of 100 billion dollars.- **45-Degree Line:** - Represented by a black line originating from the origin and extending at a 45-degree angle. This line indicates points where income equals expenditure.- **Planned Expenditure (PE) Line:** - Represented by a blue line that slopes upward, showing the relationship between income and planned expenditure.- **Full-Employment Income:** - Indicated by a vertical green line at $650 billion on the income axis.#### Text ExplanationThe economy is experiencing a ________________ with the absolute value of the gap equal to $________ billion. Closing the income gap would require a $________ billion __________ in government spending. Thus the value of the multiplier for this economy is ___________.*Instructions: On the graph, shift the PE line to show the change in the planned expenditure line necessary to close the income gap.*

Equilibrium income = $400 Full employment income = $6501. Recessionary gap 2. Absolute value of the gap = 650-400 = 250 billion 3. Closing the gap will need, 650 - 500 =150 billion increase in government spending 4. Multiplier=255150=1.67

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The following graph shows the planned expenditure line (AE) for an economy where current equilibrium income is $400 billion and full-employment income is $650 billion. (? 800 45-degree line 700 PE 600 PE 500 400 300 200 100 Full-Employment Income 100 200 300 400 500 600 700 800 INCOME (Billions of dollars) The economy is experiencing v with the absolute value of the gap equal to $ billion. Closing the income gap would require a $ billion in government spending. Thus the value of the multiplier for this economy is REAL EXPENDIT URE (Billions of dollars)

The following graph shows the planned expenditure line (AE) for an economy where current equilibrium income is $400 billion and full-employment income is $650 billion. (? 800 45-degree line 700 PE 600 PE 500 400 300 200 100 Full-Employment Income 100 200 300 400 500 600 700 800 INCOME (Billions of dollars) The economy is experiencing v with the absolute value of the gap equal to $ billion. Closing the income gap would require a $ billion in government spending. Thus the value of the multiplier for this economy is REAL EXPENDIT URE (Billions of dollars)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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