The graph below shows the aggregate expenditures model in equilibrium. a. Using

Question

The graph below shows the aggregate expenditures model in equilibrium.

a. Using the graph, show what happens to the equilibrium level of output (real GDP) when net exports increase by $2,000.

Instructions: Drag the provided line 'AE' to its new appropriate location and indicate the new equilibrium level of output by dragging the equilibrium point to its new location.

b. The $2,000 increase in net exports will immediately create an extra $2,000 in income, and some of that extra $2,000 of income will be directly spent.

     How much will expenditures increase when the economy reaches its new equilibrium?

     $

c. Using your answer in part b, or by computing the slope of the AE line above, what is the marginal propensity to consume for this nation?

d. Using the graph, determine the equilibrium level of output before and after the $2,000 increase in net exports.

     Before:

     After:

     This suggests a multiplier effect of .

Explanation / Answer

a. Equilibrium level of output also increases by $2000

Shift AE upwards with same slope , such that it cuts "Y = AE" at $8000

b. Increase in Expenditure = $1000

c. Multiplier = 1/(1-MPC)

(1/(1-MPC)*Change in AE = Change in Y

(1/(1-MPC)*1000 = 2000

1/1-MPC = 2

2 - 2MPC = 1

MPC = 1/2 = 0.5

Multiplier = 1/1-MPC = 1/1-0.5 = 2

So, Multiplier Effect = 2

If you don't understand then comment, I'ill revert back on the same. :)

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