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Homework answers / question archive / Aggrega te Expendi Inventori ture es GDP/ Income Consumpti GD P will on Governme nt expenditur e 1000 1000 1000 Exports Imports 8400 9200 10000 Investme nt 1200 1200 1200 1200 6800 7400 8000 400 600 400 600 400 600 400 600 400 600 10800 8600 1000 1000 11600 9200 1200 1
Aggrega te Expendi Inventori ture es GDP/ Income Consumpti GD P will on Governme nt expenditur e 1000 1000 1000 Exports Imports 8400 9200 10000 Investme nt 1200 1200 1200 1200 6800 7400 8000 400 600 400 600 400 600 400 600 400 600 10800 8600 1000 1000 11600 9200 1200 1. Fill in the blanks. Find the equilibrium GDP. 2. Calculate the MPC and the multiplier. 3. If the government wants to set a new equilibrium at 12000 by how much it needs to increase the government expenditure?
1) The equilibrium GDP is 10000 when inventory is equal to 0.
| GDP/ Income | Consumption | Investment | Government expenditure | Exports | Imports | Aggregate Expenditure | Inventories | GDP will |
| 8400 |
6800 |
1200 | 1000 | 400 | 600 | 8800 | -400 | not be in equilibrium |
| 9200 | 7400 | 1200 | 1000 | 400 | 600 | 9400 | -200 | not be in equilibrium |
| 10000 | 8000 | 1200 | 1000 | 400 | 600 | 10000 | 0 | be in equilibrium |
| 10800 | 8600 | 1200 | 1000 | 400 | 600 | 10600 | 200 | not be in equilibrium |
| 11600 | 9200 | 1200 | 1000 | 400 | 600 | 11200 | 400 | not be in equilibrium |
2)
MPC =change in consumption/change in income
= (9200 - 6800)/(11600 -8400)
= 0.75
Now, Multiplier = 1/(1-MPC)
= 1/(1-0.75)
= 4
3) If the government wants to being new equilibrium to 12,000 it has to increase government expenditure by 500.
This is because we know that multiplier is 4 and earlier equilibrium is 10,000
i.e change in Income = 12000- 10000
= 2000
And change in income / change in investment = multiplier
OR 2000/change in investment = 4
OR change in investment = 2000/4
= 500.
