Assume GDP in the economy is $325,000. Show the effect an increase in investment spending of...

Assume GDP in the economy is $325,000. Show the effect an increase in investment spending of $17,950 would have on the economy if the MPC is 0.12. Graphically show this affect in the aggregate expenditure model making sure to include the value for your new GDP. (3 points)

Solutions

Expert Solution

In the aggregate expenditure model, the equilibrum level of GDP is determined where the planned aggregate expenditure equals the real GDP. The planned aggregate expenditure is the sum of consumption spending, investment spending, government spending and net exports. So an increase in any of these components increases the aggregate expenditure and the aggregate expenditure line will shift upward. Here, the investment increased by $17,950 but the final aggregate expenditure will increase more than proportionately , this is because of the multiplier effect in the economy. We need to find the value of multiplier to get the final increase in the aggregate expenditure.

The multiplier is calculated as follows,

Multiplier .

So, .

And the final GDP will be ,

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

analysis the effect of an increase in initial investment on the real output of an economy?...

analysis the effect of an increase in initial investment on the real output of an economy? is there any role of interaction between multiplier effect and accelerator effect in this analysis? explain your answer pleas.

Show the effect on price (increase, decrease, no effect): Show the effect on price (increase, decrease,...

Show the effect on price (increase, decrease, no effect): Show the effect on price (increase, decrease, no effect) for each of the following situations under three form of market efficiency Situations Situations Weak Semi-Strong Strong The WSJ publishes that Landmark Inc. declared a dividend of $1 per share Landmark Inc. board members decide in a closed door meeting to open a new factory in Taiwan Your broker in NYSE tells you that Landmark Inc. CEO is going to declare retirement

Discuss the effect of monetary policy on investment spending.

Explain the effect of an increase in government spending on the on the equilibrium output and...

Explain the effect of an increase in government spending on the on the equilibrium output and inflation in the AD-AS model. Carefully distinguish between the short-run and the long-run equilibrium. Would this increase in government spending affect the potential output? Why/Why not? (Need a brief answer of around 300-400 words)

Explain the effect of an increase in government spending on the on the equilibrium output and...

Is the relationship between changes in spending and changes in real GDP in the multiplier effect...

Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship? (answer in your own words)

Is the relationship between changes in spending and changes in real GDP in the multiplier effect...

Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship, or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship? How does it relate to the economy today?

Explain how an initial change in spending results in an increase in GDP that exceeds this...

Explain how an initial change in spending results in an increase in GDP that exceeds this change. Indicate the formula for both the expenditure multiplier and the tax reduction multiplier and explain why they are different. Explain how crowding out influences the expenditure multiplier. Explain how the multiplier concept is used in the banking system. Please answer these questions in 3 to 5 paragraphs.

a) What is the effect on spending in the economy caused by changing the interest rate?...

a) What is the effect on spending in the economy caused by changing the interest rate? b) How are international trade and comparative advantage linked?

1. an increase in government spending will have a greater effect on aggregate output if ______....

1. an increase in government spending will have a greater effect on aggregate output if ______. Check all correct choices = the economy begins to trade = the resulting increase in the aggregate price level is smaller = households save less out of every additional dollar of disposable income = income is taxed at a higher rate 2. if the bank of canada's target for the overnight rate is 1.75% while the actual overnight rate is 1.70%, the appropiate monetary...

Subjects