Question

Calculate Aggregate demand in an economy and establish the level of equilibrium.

Calculate the impact on an economy of an increase investment spending, given a specific multiplier.

Explain factors that can change aggregate demand.

1. Calculate AE given the information below and completely fill in the table. There is a practice exercise in Module 7. Please attempt the practice first.
2. Where is equilibrium in this economy based on the table? State the level, don’t just point to it or highlight it.
3. Using the injections-withdrawals approach, demonstrate that the point you chose in part 2 is the equilibrium. At this point withdrawals = injections. Go to Chapter 11 if you forget how this is calculated.

Taxes: $10 at each level of income

Investments: $15

Government Spending: $25

Total Income (AO)	Taxes	Disposable Income	C	S	I	G	AE
100			125
105			135
120			145
140			150
150			155
170			160
180			170
190			180
200			185
240			200
280			215
310			230

Injections-Withdrawals Approach

Item (Name the item here)	Injections (place the $ amount in this column)	Withdrawals(place the $ amount in this column)
Totals

Question 2

1. What is the multiplier if households have an MPC of 0.6? (1 mark)
2. Create a table similar to Figure 10.8 in your textbook. Assume that the households have an MPC of 0.80 and there is a $9 billion increase to investment spending. For full marks this information must be presented in a table your answers calculated to 2 decimal places and all rows completed.

	Change in income	Change in consumption	Change in savings
Round 1
Round 2
Round 3
Round 4
Round 5
All others
Total

Question 3

Name and explain two factors that change aggregate demand, providing an example of each.

Answer 1

a.

AO	Taxes	Disposable income	C	S	I	G	AE
100	10	90	125	-35	15	25	165
105	10	95	135	-40	15	25	175
120	10	110	145	-35	15	25	185
140	10	130	150	-20	15	25	190
150	10	140	155	-15	15	25	195
170	10	160	160	0	15	25	200
180	10	170	170	0	15	25	210
190	10	180	180	0	15	25	220
200	10	190	185	5	15	25	225
240	10	230	200	30	15	25	240
280	10	270	215	55	15	25	255
310	10	300	230	70	15	25	270

b. Equilibrium is attained at the point where Y= C+I+G,

or, Y=AE

i.e, at Y= 240 here.

c. Item Injections Withdrawals

Taxes 10

Savings 30

Investment 15

Governement expenditure 25

Total 40 40

2.

a. Multiplier = 1/(1-MPC) = 1/1-0.6 = 2.5