how to get the multiplier from aggregate expenditure and real GDP graph?

Solutions

Expert Solution

On the GDP graph, the Aggregate Expenditure (AE) is shown on Y- axis and real GDP (Y) is shown on X-axis.

To start with, there are following two curves on this graph:

1. A 45⁰ line starting from the origin which shows all points where aggregate expenditure and output are equal.

2. Upward sloping AE (C+I+G+NX) curve with slope depending on MPC (Marginal Propensity to Consume) starting from a point on Y-axis.

The initial GDP level is depicted on X-axis at the intersection of abovementioned two curves.

On subsequent increase in AE, the original AE curves shift upwards parellelly to the original AE curve, making a new intersection point with the 45⁰ line, increasing the real GDP on X-axis. On the graph, the delta in AE as depicted on the Y-axis could be compared with the delta in GDP on the X-axis to find the value of multiplier (K).

Alternatively, once slope of AE curve or MPC is obtained, K= 1/(1-MPC) or K=1/MPS.

Rahul Sunny answered 2 years ago

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