Question

6. Let the AE function be given by AE0 = 100$, mpe = 0.5, and the change in AE = +50$. Fill in the following table:

Employment	Real Income Y=AP	Original Aggregate Expenditure	Subsequent Aggregate Expenditure
1	100$
2	200$
3	300$
4	400$

● Draw the economy in a graph.

● What is the multiplier in the economy?

● Let there be a change in AE from Government Expenditures of $50 in the economy. Arrive at the new Multiplier Equilibrium and draw in a graph. Be certain to show both of the AE curves in the same graph.

● Calculate the multiplier effect. Provide both the total effect as well as calculate the first 5 iterations.

Answer 1

a)

Y=AS(in$)	0	100	200	300	400
AE(in$)	100	150	200	250	300

b)

Multiplier=1/mpe=1/0.5=2

c)

Y=AS(in$)	0	100	200	300	400
AE(in$)	100	150	200	250	300
AE+$50	150	200	250	300	350

Earlier equilibrium income was $200. With increase in Government expenditure equilibrium income increased to $300 as can be seen above.