Question

Question 5: Assume for a hypothetical economy, the slope of the aggregate planned expenditures curve is .80

. a. What is the multiplier?

b. Everything else the same, by how much does equilibrium aggregate expenditure increase if exports increase from $1.75 trillion to $2.25 trillion?

Answer 1

The slope of the aggregate planned expenditures curve is .80

a. the multiplier

MPC=0.80

MPS=1-MPC

=1-0.80

=0.20

the multiplier= 1/MPS

=1/0.20

=5

b.

Change in the export=$2.25-1.75

=(+)$0.50 trillions

Everything else the same, The equilibrium aggregate expenditure increase if exports increase from $1.75 trillion to $2.25 trillion by= multiplier* change in the Export

=5*0.50 trillions

=$2.5 trillions.

The equilibrium aggregate expenditure increase by $2.5 trillions.