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ANSWERS, SOLUTIONS AND EXERCISES
PROBLEM SET
b.
3,000 5,000 8,000
Real
Aggr egat e
Expenditure
Real
GDP
7,250
5,000
3,500
EAE
45°
d. Since the MPC = 0.75, the expenditure multiplier is equal to 1/(1 – MPC) = 4.
2. a.
Real GDP Autonomous
Consumption
MPC x Disposable
Income
Consumption = Autonomous
Consumption + (MPC x
Disposable Income)
247
248 Instructor’s Manual for Economics: Principles and Applications, 6e
b.
Real GDP Consumption
Spending
Planned
Investment
Government
Spending
Net Exports Aggregate
Expenditures
c.
d. $500 billion is the equilibrium level of real GDP.
e. If the actual level of real GDP in this economy is $200 billion, then the economy
f. If planned investment falls to $25 billion, the equilibrium level of real GDP will
Chapter 23 The Short-Run Macro Model 249
3. a. The MPC is 0.80, since each 1000-unit increase Y results in an 800-unit increase
in C.
d. The 600 decrease in government purchases would cause equilibrium GDP to fall
by
4.
a. Inventories will fall unexpectedly, sending firms a signal to produce more output.
b. Inventories will rise unexpectedly, sending firms a signal to produce less output.
250 Instructor’s Manual for Economics: Principles and Applications, 6e
Chapter 23 The Short-Run Macro Model 251
7. a.
Round
Additional
Spending in
This Round
Additional
Spending in
All Rounds
b. The ultimate effect of the rise in investment spending would be an increase in real
c. In the new equilibrium, consumption spending is higher by 2,000 – 400 = 1,600.
8. a. In the table in Problem 1, the second column (C) would be affected; each number
b. The initial change in saving is the vertical distance between the two aggregate
252 Instructor’s Manual for Economics: Principles and Applications, 6e
c.
Y
2
Y
1
Real
Aggregate
Expenditure
Real
GDP
45°
(
C
+
I
+
NX
)
1
(
C
+
I
+
NX
)
2
9. a. If the MPC is 0.9, then the expenditure multiplier = 10. Therefore, the change in
b. If the MPC is 0.7, then the expenditure multiplier = 3.33. Therefore, the change in
c. If the MPC is 0.6, then the expenditure multiplier = 2.5. Therefore, the change in
10. a. If the MPC is 0.95, then the expenditure multiplier is 20. Therefore, the change in
b. If the MPC is 0.65, then the expenditure multiplier is 2.86. Therefore, the change
c. If the MPC is 0.75, then the expenditure multiplier is 4. Therefore, the change in
11.
Round Additional Spending Additional Total Additional
Chapter 23 The Short-Run Macro Model 253
(before tax) Spending (a7er tax) Spending
The final change in GDP would be smaller than $2,500 billion, because a rise and
taxes and fall in transfers acts as an automatic stabilizer, thus reducing the multiplier.
12.
Round Additional
increase in I
Additional
Spending in each round
Total Additional
Spending
13. In the long run, saving is good for the economy. When translated into investment
spending, it leads (eventually) to a higher capital stock, a more productive economy,
14. Y = [a – (b T) + IP + G + NX] / (1 – b) = [600 – (0.75 400) + 600 + 700 + 200] / (1
– 0.75) = 7,200. At this equilibrium, C = a + b(Y – T) = 600 + 0.75(7,200 – 400) =
15. Y = [a – (b T) + IP + G + NX] / (1 – b) = [1000 – (0.65 x 700) + 800 + 600 - 200] /
254 Instructor’s Manual for Economics: Principles and Applications, 6e
700) = 3,785.71. Therefore, in equilibrium, we have aggregate expenditure = C + IP +
MORE CHALLENGING
16. Initially, the economy is in equilibrium at point E, with real GDP and aggregate
expenditure (AE) both equal to $10 billion per day. Then, due to pessimism, the AE
line shifts down to AE2 on day 2, and people (for the moment) don’t yet realize that
the lower level of spending will cause their income to drop as well. That is, they
believe they will continue to earn income of $10 billion on day 2, so their spending is
On day 3, people believe they will earn income of Y2 (the same as they actually earned
on day 2), so they will spend at point L. This lower level of spending will reduce their
Continuing in this way, we make smaller and smaller movements that bring us closer
and closer to the new equilibrium at point J, where AE2 intersects the 45-degree line.
AE2
New equilibrium incomeIncome on day 2
$10 billion
0Real GDP per day
Aggregate expenditure
per day
45°
K
AE1
F
J
H
L
Chapter 23 The Short-Run Macro Model 255
17.
Y
1
Y
2
S+ T,
I+ G + NX
Real
GDP
S + T
I
2
+ G + NX
I
1
+ G + NX
0
The two lines cross at the equilibrium output level, where S + T = IP + G + NX. If
EXPERIENTIAL EXERCISES
Business investment spending is an important component of aggregate expenditure. Review
the Business Bulletin column in the Thursday Wall Street Journal. What are some recent
