1. Refer to the figure above, c.p. stands for ceteris paribus, all other things
ID: 1097473 • Letter: 1
Question
1. Refer to the figure above, c.p. stands for ceteris paribus, all other things being equal - the only thing that changes is the variable that is explicitly stated. a) Based on the figure, how much ?s autonomous spending? b) Based on the figure, when PAE = 1000 + .75Y, how much is short-run equilibrium output? c) According to the figure, would the equilibrium output level represent afull-employment equilibrium, recessionary gap or an inflationary gap? d) Based on the figure, the how much is the income-expenditure multiplier (I want an actual number)? e) Based on the figure, the how much ?s the full-employment output (I want an actual number)? f) Based on the figure, if output (Y) is 5000, how much would PAE be?Explanation / Answer
a. Autonomous spending = AE at (Y=0) = 1000
b. Short run equiibrium output = 1000 + 0.75*3000 = 3250
c. Recessionary gap, as output is less than full employment output of 4000
d. Income expenditure multiplier = 1/(1-MPC) = 1/(1-0.75) = 4
e. Full employment output is at point of intersection of PAE and 45 degree lines. Y = 4000
f. Y = 5000
PAE = 1000 + 0.75*5000 = 4750
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