Your research into a nation has yielded the following information: Autonomous ex
ID: 1221796 • Letter: Y
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 values above into the equation: AE = A + [MPC × (Y – T)] + I + G + NX. Then state the abbreviated equation for aggregate expenditures (AE).
AE = _______ + __________ Y
b. Using the abbreviated equation you computed in part a, complete the table below.
c. Knowing that AE = Y at the equilibrium level of output, what is the equilibrium level of output for this nation?
Ye: _______
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?
Ye: ______
rev: 02_16_2016_QC_CS-38004
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)
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
(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
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