 | Economics 14/e McConnell | |||||
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| Economics 14/e McConnell | |||||
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10-2 What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0 .4 .6 and 1? What will it be when the MPC is 1 .90 .67 .50 and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC in the economy is .80? If the MPC is .67? Explain the difference between the simple multiplier and the complex multiplier.
10-5 The data in columns 1 and 2 below are for a private closed economy:
| (1) Real Domestic Product | (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 | $_____ | $_____ |
| 250 | 280 | 20 | 30 | _____ | _____ |
| 300 | 320 | 20 | 30 | _____ | _____ |
| 350 | 360 | 20 | 30 | _____ | _____ |
| 400 | 400 | 20 | 30 | _____ | _____ |
| 450 | 440 | 20 | 30 | _____ | _____ |
| 500 | 480 | 20 | 30 | _____ | _____ |
| 550 | 520 | 20 | 30 | _____ | _____ |
a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.
b. Now open this economy to international trade by including the export and import figures
of columns 3 and 4. Fill in columns 5 and 6 and determine the equilibrium GDP for the open
economy. Explain why this equilibrium GDP differs from that of the closed economy.
c. Given the original $20 billion level of exports
what would be the equilibrium GDP if
imports were $10 billion greater at each level of GDP? Or $10 billion less at each level
of GDP? What generalization concerning the level of imports and the equilibrium GDP do
these examples illustrate?
d. What is the multiplier in these examples?
10-8 Refer to columns 1 and 6 in the table for question 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 all taxes are personal taxes and that government spending does not induce a shift in the private aggregate expenditures schedule. Compute and explain the change in equilibrium GDP caused by the addition of government.
10-10 Refer to the table below in answering the questions which follow:
| (1) Possible levels of employment millions | (2) Real domestic output billions | (3) Aggregate expenditures (Ca + Ig + Xn + G) billions |
| 90 | $500 | $520 |
| 100 | 550 | 560 |
| 110 | 600 | 600 |
| 120 | 650 | 640 |
| 130 | 700 | 680 |
a. If full employment in this economy is 130 million
will there be an inflationary or
a recessionary gap? What will be the consequence of this gap? By how much would aggregate
expenditures in column 3 have to change at each level of GDP to eliminate the inflationary
or recessionary gap? Explain.
b. Will there be an inflationary or recessionary gap if the full-employment level of
output is $500 billion? Explain the consequences. By how much would aggregate expenditures
in column 3 have to change at each level of GDP to eliminate the inflationary or
recessionary gap?
c. Assuming that investment
net exports
and government expenditures do not change with
changes in real GDP
what are the sizes of the MPC
the MPS
and the multiplier?
Answers:
| 10-2 The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS) the greater the multiplier. MPS = 0 multiplier = infinity; MPS = .4 multiplier = 2.5; MPS = .6 multiplier = 1.67; MPS = 1; multiplier = 1. MPC = 1; multiplier = infinity; MPC = .9 multiplier 5 10; MPC = .67; multiplier = 3; MPC = .5 multiplier = 2; MPC = 0 multiplier = 1. MPC = .8: Change in GDP = $40 billion (= $8 billion x multiplier of 5); MPC = .67: change in GDP = $24 billion ($8 billion x multiplier of 3). The simple multiplier takes account of only the leakage of saving. The complex multiplier also takes account of leakages of taxes and imports making the complex multiplier less than the simple multiplier.
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| 10-5 (a) Equilibrium GDP for closed economy = $400 billion. (b) Net export data for column 5 (top to bottom): $210 billion in each space. Aggregate expenditure data for column 6 (top to bottom): $230; $270; $310; $350; $390; $430; $470; $510. Equilibrium GDP for the open economy is $350 billion $50 billion below the $400 billion equilibrium GDP for the closed economy. The $210 billion of net exports is a leakage which reduces equilibrium GDP by $50 billion. Imports 5 $40 billion: Aggregate expenditures in the private open economy would fall by $10 billion at each GDP level and the new equilibrium GDP would be $300 billion. Imports 5 $20 billion: Aggregate expenditures would increase by $10 billion; new equilibrium GDP would be $400 billion. Exports constant increases in imports reduce GDP; decreases in imports increase GDP. (d) Since every rise of $50 billion in GDP increases aggregate expenditures by $40 billion the MPC is .8 and so the multiplier is 5.
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| 10-8 The addition of $20 billion of government expenditures and $20 billion of personal taxes increases equilibrium GDP from $350 to $370 billion. The $20 billion increase in G raises equilibrium GDP by $100 billion (5 $20 billion 3 the multiplier of 5); the $20 billion increase in T reduces consumption by $16 billion (5 $20 billion 3 the MPC of .8). This $16 billion decline in turn reduces equilibrium GDP by $80 billion (5 $16 billion 3 multiplier of 5). The net change from adding government is $20 billion (5 $100 billion 2$80 billion.).
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| 10-10 (a) A recessionary gap. Equilibrium GDP is $600 billion while full employment GDP is $700 billion. Employment will be 20 million less than at full employment. Aggregate expenditures would have to increase by $20 billion (= $700 billion - $680 billion) at each level of GDP to eliminate the recessionary gap. (b) An inflationary gap. Aggregate expenditures will be excessive causing demand-pull inflation. Aggregate expenditures would have to fall by $20 billion (= $520 billion - $500 billion) at each level of GDP to eliminate the inflationary gap. (c) MPC 5 .8 (= $40 billion/$50 billion); MPS = .2 (= 1 - .8); multiplier = 5 (= 1/.2). |
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