Consider an economy with the following characteristics (in $ billion):

C = 60 + 0.8Yd (where Yd = disposable income)
t = 0.2
I = 40
G = 30
X = 20
M = 10 + 0.14Y

(a) What is the aggregate expenditure function (AE)?
(b) Find the equilibrium GDP using algebra.
(c) Find the equilibrium GDP using graphical method. (If you write your answer, it is advisable to use a graph paper for this question.)
(d) Using the formula for the autonomous expenditure multiplier, compute the open economy multiplier for the above economy.
(e) Suppose that the government increases purchases of goods and services by $20 billion. Using your graph obtained in (c), draw the new AE line and determine the new equilibrium GDP. By how much is equilibrium GDP increased? Based on the result obtained in this part, calculate the value of the multiplier.

Q8.2 Multiplier in the Long Run
Explain why the government expenditure multiplier in the long run is zero.

Solution Summary

This solution clearly determines aggregate expenditure function (AE).

... The aggregate expenditure functions relate the level of preferred ...Function Shifts in the Expenditures Function The aggregate expenditure curve shifts when ...

... to expend, or the slope of the AE curve ... The level of income where the expenditures function intersects the ... That point is the equilibrium aggregate expenditure. ...

... 0.8Y+0.1(M/P) where AE is desired aggregate expenditure, Y is ... Why do M and P enter the AE function? ... the attached table c) Plot each of the AE functions-one for ...

... the slope of the aggregate expenditure function and equilibrium ... 2. Thus, each time autonomous expenditure changes in 1 ... in 2. <br> <br>iii) AE function is given ...

...AE function and by how much does this nationa. AE = C+I = 500+ 0.75Y+0.05W + 150 = 1150 + 0.75Y with W = 10,000. 7000. 6000 Y AE. Aggregate expenditure (AE) 5000 ...

In the aggregate expenditure model, assume that the consumption function is given by C = 800 + 0.58(Y - TP ... As per Aggregate Expenditure Model,. AE = C + I + G +X ...

... equilibrium exists where the expenditures function intersects the ... the line where real expenditure is equal ... given as AP = Y. Aggregate expenditure only consists ...

... the 45-degree line intersects the aggregate expenditure curve, so ... Hence, equilibrium expenditure is 4000. ... exists where the expenditures function intersects the ...

... 9. Compute the equilibrium income if the aggregate expenditures function is AE =300 + .4 Y. 10. Compute the autonomous and induced expenditure from the ...