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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 (𝛥I) × k = Change in income (𝛥Y)

02

Step 2. Calculation for change in real GDP

k = 5

𝛥I = $3 billion

𝛥Y = 5 × $3 billion

𝛥Y = $15 billion

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

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Most popular questions from this chapter

True or False. The aggregate expenditures model assumes flexible prices.

Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend \(20 billion at each possible level of GDP. Also, assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate expenditures schedule. What is the change in equilibrium GDP caused by the addition of government?

(1) Real Domestic Output (GDP = DI), Billions

(2) Aggregate Expenditures, Private Closed Economy, Billions

(3) Exports, Billions

(4) Imports, Billions

(5) Net Exports, Billions

(6) Aggregate Expenditures, Private Open Economy, Billions

\)200

\(240

\)20

\(30

-\)10

$230

250

280

20

30

-10

270

300

320

20

30

-10

310

350

360

20

30

-10

350

400

400

20

30

-10

390

450

440

20

30

-10

430

500

480

20

30

-10

470

550

520

20

30

-10

510

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?

What is an investment schedule, and how does it differ from an investment demand curve?

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
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