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In: Economics

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

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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