Question

1. Suppose you are given the following information about Japan's economy: C = 150 + 0.8(Y-T) T = 0 Iplanned = 300 NX = 50 G = 200 a) Set up the aggregate planned expenditure function for Japan. (Write down the equation). b) Graph the aggregate expenditure function, using the diagram below. Be sure to label you graph. Carefully indicate the intercept. What is the slope of the line? c) Calculate equilibrium Real GDP (Y). d) Indicate the equilibrium on your diagram above. e) What is the value of the multiplier for Japan? f) Suppose the economy is in recession and GDP needs to rise by $800. By how much should the Japanese government increase government spending to get the economy out of recession? Use the multiplier to calculate the figure. g) Suppose the interest rates fall causing investment spending to rise such that the change in investment is $100 (Al=100). Using the multiplier, by how much will equilibrium real GDP change? h) Briefly explain why there is a multiplier effect in aggregate spending (GDP).

Answer 1

a) AE= C+I+G+NX

C=150+0.8(Y-T)

I=300

G=200

T=0

NX=50

AE=150+0.8(Y-0)+300+200+50

b) AE=700+0.8Y

'X' Intercept= 700

'Y' Intercept = Y=700/0.8

=875

Slope:- Y=mx+c

X=my+c

X=700+0.8y

Y=700+X/0.8

=1/0.8X+875

Slope =1/0.8 Or 1.25

Y=AE Expenditure - Intercept C+1+WENX 2007 Z o 200 goo 600 800 tooo GDP

c) Y=C+I+G++NX

= 150+0.8(Y-0)+300+200+50

=150+0.8Y+550

=700+0.8Y

Y=700/0.8

=875

e) Value of multiplier = 1/ MPS

Mpc= 0.8

MPS=0.2

=1/0.2

=5