Your research into a nation has yielded the following information: Autonomous ex

Question

Your research into a nation has yielded the following information: Autonomous expenditure (A) $3,000 Gross investment (I) $2,000 Government purchases (G $2,500 Net exports (NX $1,000 Taxes T) $2,000 MPC 0.75 a. Substitute the value above into the equation: AE G NX. Then state the abbreviated equation for aggregate expenditures (AE) AE b. Using the abbreviated equation you computed in part a, complete the table below Aggregate Expenditures Real GDP (AE) (Y) (dollars) dollars 8,000 16,000 24,000 C. Knowing that AE Y at the equilibrium level of output, what is the equilibrium level of output for this nation? d. What is the expenditures multiplier for this economy? e. If government purchases increase by $1,000, from $2,500 to $3,500, what will be the new equilibrium level of output?

Explanation / Answer

(a)

AE = 3,000 + [0.75 x (Y - 2,000)] + 2,000 + 2,500 - 1,000

= 6,500 + 0.75Y - 1,500

AE = 5,000 + 0.75Y

(b)

(c)

When AE = Y,

Y = 5,000 + 0.75Y

(1 - 0.75)Y = 5,000

0.25Y = 5,000

Y = 20,000

(d)

Expenditure multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4

(e)

If G increases by $1,000, increase in output = $1,000 x 4 = $4,000

New equilibrium output = $(20,000 + 4,000) = $24,000

Y AE 0 = 5,000 + 0.75 x 0 = 5,000 8,000 = 5,000 + 0.75 x 8,000 = 5,000 + 6,000 = 11,000 16,000 = 5,000 + 0.75 x 16,000 = 5,000 + 12,000 = 17,000 24,000 = 5,000 + 0.75 x 24,000 = 5,000 + 18,000 = 23,000

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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