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Chapter 11: Q5. (page 236)

If the multiplier is 5 and investment increases by \(3 billion, equilibrium real GDP will increase by

  1. \)2 billion.

  2. \(3 billion.

  3. \)8 billion.

  4. $15 billion.

Short Answer

Expert verified

Option (d): $15 billion

Step by step solution

01

Step 1. Relation between the multiplier and real GDP

The multiplier measures the multiple increases in the income of an economy due to a change in a spending component like an investment. For example, an increase in investment has indirect effects on consumption, exports, and other spending components of GDP, resulting in a greater change in income. The income does not increase only because of investment increase but because of other components as well.

The multiplier (k) is related to change in income or real GDP in the following manner:

Change in investment (饾洢I) 脳 k = Change in income (饾洢Y)

02

Step 2. Calculation for change in real GDP

k = 5

饾洢I = $3 billion

饾洢Y = 5 脳 $3 billion

饾洢Y = $15 billion

Therefore, the equilibrium real GDP will increase by $15 billion.

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Most popular questions from this chapter

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?

Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the decline in the aggregate expenditures schedule. What term is used for the ratio of a decline in real GDP to the initial drop in aggregate expenditures?

Suppose that a certain country has an MPC of 0.9 and a real GDP of \(400 billion. If its investment spending decreases by \)4 billion, what will be its new level of real GDP?

Assuming the level of investment is \(16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. What are the values of the MPC and MPS?

Possible Levels of Employment, Millions
Real Domestic Output (GDP = DI), Billions
Consumption, Billions
Saving, Billions
40\)240$244
45260260
50280276
55300292
60320308
65340324
70360340
75380356
80400372

Answer the following questions, which relate to the aggregate expenditures model:

  1. If Ca is \(100, Ig is \)50, Xn is 鈭抃(10, and G is \)30, what is the economy鈥檚 equilibrium GDP?

  2. If real GDP in an economy is currently \(200, Ca is \)100, Ig is \(50, Xn is 鈭抃)10, and G is \(30, will the economy鈥檚 real GDP rise, fall, or stay the same?

  3. Suppose that full-employment (and full-capacity) output in an economy is \)200. If Ca is \(150, Ig is \)50, Xn is 鈭抃(10, and G is \)30, what will be the macroeconomic result?
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