The following graph shows the total expenditure line (TE) for an economy where c

Question

The following graph shows the total expenditure line (TE) for an economy where current equilibrium output is $400 billion and potential output is $650 billion 800? 45-degree lin TE TE u 400 Z 300 100 Potential GDP 0 00 200 300 400 0 700800 REAL GDP (Billions of dollars) equal tos billion. Thus, the value of the multiplier for this economy is The economy is experiencing billion. To close the output gap, government purchases could by S On the graph, shift the TE line to show the change in total expenditure necessary to close the output gap

Explanation / Answer

From the graph, we can see that the nation is unable to meet the potential demand in the economy. That is though the potential consumption is $ 650 billion, the output from the economy is only $ 400billion. So that economy is experiencing an output deficit of $650-$400=$250 billions. In order to close the output gap, government purchases could increase by $250 billion { since GDP = C+G+I+NX}. Thus, the value of the multiplier for this economy is 650/400= 1.625.

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