Question

The following table shows the real output demanded and supplied at various price levels in a hypothetical economy.

Real Output Demanded	Price Level	Real Output Supplied
(Billions of dollars)	(Index number)	(Billions of dollars)
40	160	340
80	120	320
120	80	280
200	40	200
320	20	80

On the following graph, use the blue points (circle symbol) to plot the aggregate demand (Initial AD) curve for the economy. Then use the orange points (square symbol) to plot the aggregate supply (AS) curve for the economy.

Note: Line segments will automatically connect the points.

Initial ADASNew AD08016024032040020016012080400PRICE LEVEL (Billions of dollars)REAL GDP (Index numbers)

The equilibrium price level is   , and the equilibrium level of real output is   .

Suppose that the government spending increases by $16 billion and the expenditure multiplier in this economy is 5.

On the previous graph, use the purple points (diamond symbol) to illustrate the effect of the increase in government spending on the aggregate demand (New AD) curve.

The change in government spending   the equilibrium level of real output by   . The price level increase   the multiplier effect.

Answer 1

The initial equilibirum occurs at the intersection of the inital AD and AS curve.

The equlibirum price level $40, and the equilibrium level of real output is 200 billions of dollar/.

Government spending increase by $16 billion.

Expenditure multiplier is 5.

Increase in AD = ($16 billion) * (5)

Increase in AD = $80 billion.

Hence, the new AD will rise by $80 billion at each price level.

Price level	Initial AD	AS	New AD
160	40	340	120
120	80	320	160
80	120	280	200
40	200	200	280
20	320	80	400

Price level 80 160 320 400 480 240 Real GDP - Initial AD ---AS ---New AD

The new equilbrium occurs at the intersection point of New AD and AS curve.

The new equilibrium price si $56 and equilibrium level of real output is 240 billion of dollars.

The change in government spending increases the equilibrium level of real output by 40 billion of dollars. The price level increases weakens the mutiplier effect