Question

2. For the figure shown, answer the following questions: PAE = Y PAEZ PAE Planned aggregate expenditure (PAE, billions of $) 500 400 Actual aggregate expenditure (output or GDP, Y, billions of $) a. What is the expenditure multiplier in this economy? b. What is the marginal propensity to consume in this economy?

Answer 1

A) When aggregate expenditure = PAE1, equilibrium income = $400 billions. When aggregate expenditure = PAE2, equilibrium income= $500 billions.

Expenditure multiplier = change in Y / change in autonomous expenditure = ∆Y / ∆PAE = $(500 - 400) billions / $60 billions = $100 billions / $60 billions = (10/6) = (5/3)

B) Expenditure multiplier = 1/(1 - MPC)

Or, (5/3) = 1/(1 - MPC)

Or, 5(1 - MPC) = 3

Or, 1 - MPC = (3/5)

Or, MPC = 1 - (3/5) = 2/5 = 0.4