Question

The purpose of this assignment is to practice the multiplier effect.

Using the Multiplier Formula

Use the information in the table to answer the following questions.

Real GDP ​(Y​)	Consumption ​(C​)	Planned Investment ​(I​)	Government Purchases ​(G​)	Net Exports ​(NX​)	Planned Aggregate Expenditure ​(AE​)
​$8 comma 0008,000	​$6,900	​$1 comma 0001,000	​$1 comma 0001,000	minus−​$500500
9 comma 0009,000	​7,700	1 comma 0001,000	1 comma 0001,000	negative 500−500
10 comma 00010,000	​8,500	1 comma 0001,000	1 comma 0001,000	negative 500−500
11 comma 00011,000	​9,300	1 comma 0001,000	1 comma 0001,000	negative 500−500
12 comma 00012,000	​10,100	1 comma 0001,000	1 comma 0001,000	negative 500−500

​Note: The values are in billions of 2009 dollars.

a. What is the equilibrium level of real​ GDP?

b. What is the MPC​?

c. Suppose government purchases increase by​ $200 billion. What will be the new equilibrium level of real​ GDP? Use the multiplier formula to determine your answer.

Answer 1

(a)

AE = C + I + G + NX

Y	C	I	G	NX	AE
8,000	6,900	1,000	1,000	-500	8,400
9,000	7,700	1,000	1,000	-500	9,200
10,000	8,500	1,000	1,000	-500	10,000
11,000	9,300	1,000	1,000	-500	10,800
12,000	10,100	1,000	1,000	-500	11,600

In equilibrium, Y = AE = 10,000

(b)

MPC = Change in C / Change in Y = (7,700 - 6,900) / (9,000 - 8,000) = 800/1,000 = 0.8

(c)

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1/0.2 = 5

Increase in Y ($ Billion) = Increase in G x Multiplier = 200 x 5 = 1,000

New Y ($ Billion) = 10,000 + 1,000 = 11,000