3. Use the following table to answer the questions below: Price LevelAE When lo
ID: 1111287 • Letter: 3
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3. Use the following table to answer the questions below: Price LevelAE When lo $400 AE When lo- $500AS 75 $9,000 $11,000 $7,000 $8,000$10,000 $8,000 I $9,000 $8,000 100 125 $7,000 $9,000 150 $6,000 $10,000 a) Based on the table above, what is the value of the expenditure multiplier if b) What is the short-run equilibrium value of Y if the autonomous part of c) What is the short-run equilibrium value of Y if the autonomous part of d) Is there inflation or deflation after the autonomous part of investment e) What is the value of the general multiplier if we take into consideration prices are fixed? investment is $400 investment is S500? increases? By what percentage have short-run equilibrium prices changed? price fluctuations? (Hint: this is simply how much Y would change with a change in autonomous spending (A). Increase A by 100 and see what the new Y would be in equilibrium after prices adjust.) Is the value you found in part e greater or less than the value you found in part a? Explain why this is the case. If the potential GDP for this economy is $8,000, do we havea recessionary or inflationary gap (or neither) and what can we expect to happen to wages at each level of autonomous investment? f) g)Explanation / Answer
Price Level - Overall level of the prices of goods and services in the economy.
AE = It is the aggregate expensiture of all the goods and service in the economy. It is basically the total expenditure.
I0 = Is the investment level in the economy
AS = It is the aggregate supply of the total goods and services produced in the economy
(a) SO at price level 75
first we calculate the Marginal Propensity to Save , here I0 = Saving, So Change in saving would be (500-400) = 100
Change in AE would be (11000-9000) = 2000
MPS or marginal Propensity to save = 100/2000 = 0.05
MPS = change in saving brought by a change in disposable income.
Expenditure Multiplier is = 1/MPS = 1/0.05 = 20.
An expenditure multiplier means that as your income increases, you will tend to spend more and its a process which would keep multiplying and increasing .
(b) The short run equilibrium when investment is 400 would be achieved when AE = AS which happens at price level 100 and AE=AS = 8000.
(c) The short run equilibrium when investment is 500 would be achieved when AE = AS which happens at price level 125 and AE=AS = 9000.
(d) So when autonomous investment increases, there is an increase in aggregate expenditure as well and prices and investment have a negative relation and the price change is by 100-75=25, %change in price = (25/75)*100 =33%
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