nbld 615972 -226017627& tld 226017676 MINDTAP plia Homework: Demand-Side Equilib

Question

nbld 615972 -226017627& tld 226017676 MINDTAP plia Homework: Demand-Side Equilibrium: Unemployment or Inflation? Back to Attempts: 0.5 Keep the Highest:0.S/5 3. The multiplier and the MPCc Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Noither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MpC is nerefore, its init al total expendture line has a slope of 0.5 and passes through the port (100, 100). The second economy's MPC is 0.6. Therefore, its initial total expenditure ine has a slope of 0.6 and passes through the point (100, 100), Now, suppose there is a decrease of $40 billion in investment in each economy. symbol on each of the previous graphs to indicate the new total expenditure äine for each economy, Then place a black point the new level of equilibrium output. (Hint: You can see the slope and vertical axis intercept of a line on the graph olug symbol) on each graph showing by selecting it.) 45-Degree Line 200 O Type here to search

Explanation / Answer

(a) Closed Economy-

Using Keynes's Income - Expenditure Approach,aggregate expenditure is the total expenditure that business firms and households make on goods and services at various levels of national income.

AE = Consumption (C) + Investment (I) + Government expenditure (G)

C = a + b Y, where a is autonomous consumption and b is slope of Consumption or Marginal Propensity to Consume. Investment is considered autonomous of income and is fixed. These are depicted in the graph below. The graph also consists of an income line OZ making 45 degree angle with X- Axis. This is used to measure the difference between income and aggregate expenditure and represents savings gap.

In the figure, National Income is depicted on OX Axis and Aggregate Demand on OY Axis. The equilibrium occurs at point E where Y* is the equilibrium level of National Income. At Y1, AE exceeds Y , so , it is beneficial for the firm to produce more as their inventories are getting depleted and thus national income or output increases to Y* where AE = Y. At Y2, income exceeds AE and thus, the output or national income will decline to Y* level as inventories are piling up.

Mathematically-

1 / 1 - b is the multiplier.

(B) Open Economy-

Now, AE = C + I + G + Net exports ( X- M)

and M = Autonomous M + m Y, where m is Marginal propensity to import.

The equilibrium can be depicted in the following graph. IT is same as above. Only we have added N X to A E curve which raises the AE curve upwards when N X is positive or X > M and shifts it downwards when M > X and equilibrium is at point E*.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.