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

1) The equilibrium GDP is 10000 when inventory is equal to 0.

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.