# 0.4 The expenditure-output model  (Page 16/16)

 Page 16 / 16

## Solution

The following table illustrates the completed table. The equilibrium is level is italicized.

National Income After-tax Income Consumption I + G + X Minus Imports Aggregate Expenditures
$8,000$4,800 $4,340$5,000 $240$9,100
$9,000$5,400 $4,820$5,000 $270$9,550
$10,000$6,000 $5,300$5,000 $300$10,000
$11,000$6,600 $5,780$5,000 $330$10,450
$12,000$7,200 $6,260$5,000 $360$10,900
$13,000$7,800 $46,740$5,000 $4,390$11,350

The alternative way of determining equilibrium is to solve for Y, where Y = national income, using: Y = AE = C + I + G + X – M

Solving for Y, we see that the equilibrium level of output is Y = $10,000. Explain how the multiplier works. Use an MPC of 80% in an example. ## Solution The multiplier refers to how many times a dollar will turnover in the economy. It is based on the Marginal Propensity to Consume (MPC) which tells how much of every dollar received will be spent. If the MPC is 80% then this means that out of every one dollar received by a consumer,$0.80 will be spent. This $0.80 is received by another person. In turn, 80% of the$0.80 received, or $0.64, will be spent, and so on. The impact of the multiplier is diluted when the effect of taxes and expenditure on imports is considered. To derive the multiplier, take the 1/1 – F; where F is equal to percent of savings, taxes, and expenditures on imports. ## Review questions What is on the axes of an expenditure-output diagram? What does the 45-degree line show? What determines the slope of a consumption function? What is the marginal propensity to consume, and how is it related to the marginal propensity to import? Why are the investment function, the government spending function, and the export function all drawn as flat lines? Why does the import function slope down? What is the marginal propensity to import? What are the components on which the aggregate expenditure function is based? Is the equilibrium in a Keynesian cross diagram usually expected to be at or near potential GDP? What is an inflationary gap? A recessionary gap? What is the multiplier effect? Why are savings, taxes, and imports referred to as “leakages” in calculating the multiplier effect? Will an economy with a high multiplier be more stable or less stable than an economy with a low multiplier in response to changes in the economy or in government policy? How do economists use the multiplier? ## Critical thinking questions What does it mean when the aggregate expenditure line crosses the 45-degree line? In other words, how would you explain the intersection in words? Which model, the AD/AS or the AE model better explains the relationship between rising price levels and GDP? Why? What are some reasons that the economy might be in a recession, and what is the appropriate government action to alleviate the recession? What should the government do to relieve inflationary pressures if the aggregate expenditure is greater than potential GDP? Two countries are in a recession. Country A has an MPC of 0.8 and Country B has an MPC of 0.6. In which country will government spending have the greatest impact? Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and long-term impacts of such policies on the economy? What role does government play in stabilizing the economy and what are the tradeoffs that must be considered? If there is a recessionary gap of$100 billion, should the government increase spending by \$100 billion to close the gap? Why? Why not?

What other changes in the economy can be evaluated by using the multiplier?

Siegfried, John J., and Andrew Zimbalist. “The Economics of Sports Facilities and Their Communities.” Journal of Economic Perspectives . no. 3 (2000): 95-114. http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.14.3.95.

different between capital and wealth
What is scale of reference?
What is monopoly?
Finda
It is the control of market by single seller or producer
Mayen
the exclusive possession or control of the supply or trade in a commodity or services
Brains
what is scarcity
scarcity means that the resources which we can produce goods and services relatives to wants for them.
Bonny
what is demand
demand means that's good demand according to your needs is called demand
Bonny
needs of people ar called demand
Francis
what's the difference between opportunity cost and production possibility curve?
Francis
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
Bonny
different between capital and wealth
Samuel
apportunity cost means the profit lose when one alternative is selected over other
Bonny
what is economocs
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
Abubakari
It deals with making choices in the face of scarcity
Abu
what is perfect complements?
Bilal
what is scarcity
Bonny
difference between fixed policy and monetary policies
explain why the ppc curve slopes downward?
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
Sean
what is perfect complements?
Bilal
determination of perfect competition
How can economics be important to us
how can economics be important to us
Winny
economics is important on expenditure analysis
Umar
because it is to make choice
Puosour
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Sarah
Economic is important because of the fact of scarcity and desire for efficiency...
Ernest
it enable us to make rational choice
Osman
what is unemployment
scor
unemployment occurs when a person is actively searching for employment is unable to find work .....
Fatema
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
Lintoya
It is important because economics provide solutions about scarcity.
Pobreng
which of the following measures will the government take during inflation?
Ally
Price falls and demand is inelastic Please define it with an example and diagram.
difference between nominal gdp and real gdp
cleophas
what are the factors of production
capital, labor, technology
Lucas
is economic a science
as economic a science
Emmanuel
yes because it study human behavior
Ahmed
yes it deal with human activity and the welfare of people in the country
Nsobila
yes because it uses scientific methods of solving problems
Osman
yes
Sarah
yes because it uses scientific methods in solving problems
Sarah
pls can I ask a question
Sarah
yes
Nyakeh
Pls what are the characteristics of opportunity costs
Sarah
identify the type of price elasticity of demand
Mamie
economic is a science
Azeez
what is monopoly
Issah
Is Economics a Science By By By Rebecca Butterfield By OpenStax By Brooke Delaney By Brooke Delaney By Kevin Moquin By Rhodes By Dionne Mahaffey By By Katy Keilers By OpenStax