Macro - The Expenditure-Output Model

Y=$100 C=$100 I+G+X=$100 Aggregate Expenditures (AE)=C+I+G+X−M=$100 What must the value of national imports (M) be for this economy to be in macroeconomic equilibrium?

$100

Researchers have estimated that the marginal propensity to save is equal to 0.25. What is the expenditure multiplier?

4 The expenditure multiplier can be expressed in the following two ways: Expenditure multiplier=1/MPS where MPS is the marginal propensity to save and MPS=1−MPC. Expenditure multiplier =1/(1−MPC) where MPC is the marginal propensity to consume. Therefore, the expenditure multiplier =1/(0.25)=4

True or false? According to the Keynesian cross diagram, equilibrium occurs where Line G (Potential GDP) intersects Line A (AE Line).

False The intersection of the aggregate expenditure line with the 45-degree line will show the short-run equilibrium for the economy because it is the point where aggregate expenditure is equal to output or real GDP.

National Income (Y)=$500 Consumption (C)=$100 Imports (M)=$100 I+G=$150 What must the value of export expenditures (X) be for this economy to be in macroeconomic equilibrium?

$350 Equilibrium occurs when National Income = Aggregate Expenditures or alternatively when Y = AE Calculate AE: AE=C+I+G+X−M=$100+$150+X−$100=$150+X Set Y = AE: $500=$150+X which implies G=$350 Therefore, for this economy to be in macroeconomic equilibrium export expenditures must be equal to $350.

National Income (Y)=$650 Consumption (C)=$175 Imports (M)=$125 G+X=$250 What must the value of investment expenditures (I) be for this economy to be in macroeconomic equilibrium?

$350 Equilibrium occurs when National Income = Aggregate Expenditures or alternatively when Y = AE Calculate AE: AE=C+I+G+X−M=$175+$250+G−$125=$300+G Set Y = AE: $650=$300+G which implies I=$350 Therefore, for this economy to be in macroeconomic equilibrium investment expenditures must be equal to $350.

Suppose a rallying stock market causes aggregate expenditures by consumers to increase by $200. If the MPS is 0.2, what is the change in real GDP associated with this positive shock to the economy?

$1,000 Given: Initial change in aggregate expenditures =$200; MPS =0.2. Find the expenditure multiplier. Expenditure multiplier =1/MPS=1/(0.2)=5. Total impact from the initial change in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier =$200×5=$1,000. Therefore, a $200 increase in aggregate expenditures by consumers will cause real GDP to increase by $1,000.

National Income (Y)=$400; Tax Rate =0.3 Consumption (C)=$40+0.8(Y−T) I+G+X=$150 What must the value of imports (M) be for this economy to be in equilibrium?

$14 Equilibrium occurs when National Income = Aggregate Expenditures or alternatively when Y = AE Calculate: T: 400*0.3 = 120 C: 40+0.8(400-120) = 264 AE: 400-264-150 = -14 Imports (M) must be $14 to balance aggregate expenditure into equilibrium.

Suppose the economy is in a recessionary gap where real GDP is $100 below its potential. Furthermore, assume that researchers have estimated the the marginal propensity to consume to be 0.75. How much must the government spend to fully correct for this recessionary gap?

$25 Given: Final change in aggregate expenditures =$100; MPC =0.75. Find the expenditure multiplier. Multiplier =1/(1−MPC)=1/(1−0.75)=1/(0.25)=4. Total impact from the initial increase in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier. This implies that $100=A×4 or A=$25. Therefore, the government must increase spending by exactly $25 to increase real GDP by $100 which would fully correct for the recessionary gap.

If the final change in real GDP is $150 and the marginal propensity to save is 0.25, then what must have been the initial change in aggregate expenditures?

$37.50 Given: Final change in aggregate expenditures =$150; MPS =0.25. Find the expenditure multiplier. Expenditure multiplier =1/MPS=1/(0.25)=4. Total impact from the initial change in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier. This implies that $150=A×4 or A=$37.50. Therefore, aggregate expenditures must have initially increase by $37.50 to increase real GDP by $150.

Suppose the economy is in an inflationary gap where real GDP is $250 above its potential. Furthermore, assume that researchers have estimated the the marginal propensity to save to be 0.2. How much must the government decrease spending to fully correct for this inflationary gap?

$50 Given: Final change in aggregate expenditures =−$250; MP2 =0.2. Find the expenditure multiplier. Multiplier =1/MPS=1/(0.2)=5. Total impact from the initial decrease in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier. This implies that −$250=A×5 or A=−$50. Therefore, the government must decrease spending by exactly $50 to decrease real GDP by $250 which would fully correct for the inflationary gap.

Suppose a decrease in interest rates causes aggregate expenditures on investment to increase by $50. If the marginal propensity to consume is 0.9, then what is the total impact of this increase in aggregate expenditures on investment on real GDP?

$500 Given: Initial change in aggregate expenditures =$50; MPS =0.9. Find the expenditure multiplier. Expenditure multiplier =1/(1−MPC)=1/(1−0.9)=1/(0.1)=10. Total impact from the initial increase in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier =$50×10=$500. Therefore, an increase in aggregate investment spending will cause real GDP to increase by $500.

The economy is on the rise and causing aggregate expenditures by consumers to increase by $25. If the marginal propensity to consume is 0.6, then what is the total impact of the increase in aggregate expenditures on the real GDP?

$62.5 Given: Initial change in aggregate expenditures =$25; MPC =0.6. Find the expenditure multiplier. Expenditure multiplier =1/(1−MPC)=1/(1−0.6)=1/(0.4)=2.5. Total impact from the initial increase in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier =$25∗2.5=$62.5. Therefore, a $25 increase in aggregate expenditures by consumers will cause real GDP to increase by $62.5.

Suppose soaring increases in gas prices lead consumers to travel less, so gas consumption declines by $10. If the MPC is 0.8, what is the total change in real GDP associated with this initial change in aggregate expenditures of consumers?

-$50 Given: Initial change in aggregate expenditures =$10; MPC =0.8. Find the expenditure multiplier. Multiplier =1/(1−MPC)=1/(1−0.8)=1/(0.2)=5. Total impact from the initial decrease in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier =−$10×5=−$50. Therefore, a decrease of $10 in aggregate expenditures by consumers will cause real GDP to decrease by $50.

Suppose the government decreases domestic expenditures by $500 without any change in tax policy. If the marginal propensity to save is 0.8, by how much will real GDP change?

-$625 Given: Initial change in aggregate expenditures =−$500; MPS =0.8. Find the expenditure multiplier. Expenditure multiplier =1/MPS=1/(0.8)=1.25. Total impact from the initial change in aggregate expenditures on real GDP = Initial change in aggregate expenditures x expenditure multiplier =−$500×1.25=−$625. Therefore, a decrease in aggregate expenditures by the government will cause real GDP to decrease by $625.

Researchers have estimated that the expenditure multiplier is 8. What is the value of the marginal propensity to consume? Please, present your answer with three significant numbers after the decimal place, i.e. do not round your answer.

0.875 The expenditure multiplier can be expressed in the following two ways: Expenditure multiplier =1/MPS where MPS is the marginal propensity to save and MPS=1−MPC. Expenditure multiplier =1/(1−MPC)where MPC is the marginal propensity to consume. Therefore, if the spending multiplier is 8, then 8=1/(1−MPC) which implies 1−MPC=1/8 which means that MPC=1−1/8=0.875.

Consider the following information: Marginal Propensity to Consume (MPC) = 20% Tax rate = 10% Marginal Propensity to Import (MPI) = 10% Calculate the expenditure multiplier. Round your answer to two decimals.

1.09 Consider the following formula Expenditure Multiplier =1(1−MPC∗(1−t)+MPI) where MPC is the marginal propensity to consume, t is the tax rate and MPI is the marginal propensity to import. Substituting the values given in the problem, we have: Expenditure multiplier = =1(1−0.2∗(1−0.1)+0.1)=10.92=1.09

Researchers have estimated that the marginal propensity to consume is equal to 0.125. What is the expenditure multiplier? Round to the nearest hundredth.

1.14 The expenditure multiplier can be expressed in the following two ways: Expenditure multiplier =1MPS where MPS is the marginal propensity to save and MPS=1−MPC. Expenditure multiplier =1(1−MPC) where MPC is the marginal propensity to consume. Therefore, the expenditure multiplier =1(1−0.125)=1(0.875)=1.14.

Which of the following statements describe the marginal propensity to save? Select all that apply: It is calculated by dividing the changes in savings by changes in income. It is the fraction of additional income that is saved rather than consumed. It measures the total amount of income that is saved. It is calculated by dividing change in savings by total savings.

It is calculated by dividing the changes in savings by changes in income. It is the fraction of additional income that is saved rather than consumed. The marginal propensity to save (MPS) is the fraction of additional income that is saved rathern consumed, and is calculated by diving changes in savings by changes in income.

Which of the following statements describe the marginal propensity to consume? Select all that apply: It measures the proportion of extra income that is spent on the consumption of goods and services. It measures the total amount of extra income that is spent on the consumption of goods and services. It is calculated by dividing the changes in consumption by changes in income. It is the proportion of additional income that a consumer saves, as opposed to the consumer spending it on the consumption of goods and services.

It measures the proportion of extra income that is spent on the consumption of goods and services. It is calculated by dividing the changes in consumption by changes in income. The marginal propensity to consume (MPC) is the proportion of additional income that a consumer spends on the consumption of goods and services rather than saving it, and is calculated by dividing changes in consumption by changes in income.

True or false? Because of the spending multiplier effect, a relatively small initial change in aggregate expenditures can eventually cause a relatively large change in aggregate expenditures.

True The reason is that a change in aggregate expenditures circles through the economy: households buy from firms, firms pay workers and suppliers, workers and suppliers buy goods from other firms, those firms pay their workers and suppliers, and so on. In this way, the original change in aggregate expenditures is actually spent more than once.

The spending multiplier effect is when the federal reserve increases its purchase of government bonds to increase the effectiveness of expansionary fiscal policy. government matches consumer spending dollar for dollar through discretionary fiscal policy. an initial increase in the supply of money cycles repeatedly through the economy and has a larger impact than the initial increase in the supply of money. an initial increase in spending cycles repeatedly through the economy and has a larger impact than the initial dollar amount spent.

an initial increase in spending cycles repeatedly through the economy and has a larger impact than the initial dollar amount spent.

The marginal propensity to save is the fraction of wealth not consumed. is the fraction of additional income saved rather than consumed. rises when wealth rises rises when income rises

is the fraction of additional income saved rather than consumed

The marginal propensity to consume is the fraction of total income spent on consumption rises as income falls. falls as consumption rises. is the fraction of additional income spent on consumption

is the fraction of additional income spent on consumption

Which line in the expenditure-output model represents the potential GDP?

the vertical line Potential GDP refers to the quantity of output that the economy can produce with full employment of its labor and physical capital.