10.00 points Refer to the figures below. Assume that 01 is 225, o2 is 200, O3 is

Question

10.00 points Refer to the figures below. Assume that 01 is 225, o2 is 200, O3 is 175, Ps is 120, P2 is 100, and P1 is 80. Aggregate Expenditures Mode Aggregate Demand-Aggregate Supply Model AD Real domestic output, GDP Real domestic outpu GOP Instructions: Enter your answers as positive numbers. Round answer in Part b) to one decimal place. a. If the price level increases from P1 to P3 in the diagram on the right, by how much will real GDP change? GDP will decreaseby S b. If the slopes of the AE lines in the diagram on the left are 0.9 and equal to the MPC, in what direction and by how much will the aggregate expenditures schedule in this diagram shift as a result of the previously determined change in real GDP? AE will need to [decrease-D by $ 0 c. What is the size of the multiplier in this example?

Explanation / Answer

ANSWER:

1) Real gdp will fall as movement along the ad schedule and a shift downward of ae schedule. the decrease in real gdp = q1 - q3 = 225 - 175 = $50

2) we will first find the multiplier here (that is answer of part 3)

multiplier = 1 / ( 1 - mpc)

multiplier = 1 / ( 1 - 0.9)

multiplier = 1 / 0.1 = 10

we know that change in real gdp = multiplier * change in aggregrate expenditure

50 = 10 * change in aggregrate expenditure

change in aggregrate expenditure = 50 / 10 = 5

as the real gdp decreases , the aggregrate expenditure will decrease to ae3 at p3. by $5.

3) as found out in part 2 , the multiplier is 10.

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