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

  1. 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)

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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 2 years ago
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