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Chapter 12: Q.19 (page 279)

Following the rightward shift in the aggregate demand curve generated by the \( 0.1 trillion rises in real planned investment spending in Problem 12-18, why does the actual equilibrium level of real GDP increase by only \)0.3 trillion instead of $0.5 trillion?

Short Answer

Expert verified

the actual equilibrium level of real GDP increased by only $0.3trillion instead of $0.5 trillion due to crowding-out effect.

Step by step solution

01

introduction

Crowding out impact alludes to a situation where the rise in the price level or interest rates hoses the initial increase in investment or government spending.

02

explanation

The aggregate demand curve shifts because of an adjustment of any of the independent variables at a given price level. The size of the shift is given by the multiplier times the adjustment of the independent variable.

The aggregate demand increases by $0.5trillion as investment increases by $0.1trillion. However, when the price level rises from $110to $115, a piece of the initial increase in aggregate demand is crowded out. This is given by a development up along the aggregate demand curve. This is the reason the real GDP increases by just $0.3 trillion instead of $0.5 trillion.

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Most popular questions from this chapter

How could toughened federal regulations of businesses during the current decade have inhibited a rightward shift in the imvestment function?

The multiplier in a country is equal to5, and households pay no taxes. At the current equilibrium real GDP of \(14trillion, total real consumption spending by households is \)12trillion. What is real autonomous consumption in this country?

Consider Table 12-2. What is the average propensity to consume at the equilibrium level of real GDP? What is the average propensity to save?

At various times in the past-the early 1980 s, early 1990 s, early 2000 s, and late 2000 s-business profit expectations plummeted, and firms cut back on their investment spending. The ratio of total investment spending to companies' aggregate profit flows decreased markedly. In each instance, real GDP declined, and the U.S. economy fell into recession. At the end of the recession intervals of the early 1980 s, early1990 s, and early 2000 s, business profit expectations improved. Firms responded by boosting their investment spending, and both real GDP and the ratio of investment expenditures to firms' profits recovered fully. At the conclusion of the late-2000s recession, however, this ratio failed to return to its previous level. By the time you have completed this chapter, you will understand why the result during this current decade has been a sluggish improvement in real GDP and, hence, an unusually slow economic recovery.

Evaluate why autonomous changes in total planned expenditures have a multiplier effect on equilibrium real GDP

Calculate the multiplier for the following cases.

a.MPS=0.25

b. MPC=56

c. MPS=0.125

d. MPC=67
See all solutions

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