978-1259663048 Chapter 26W Solutions Manual

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CHAPTER 26W: THE MULTIPLIER MODEL

Questions and Exercises

1. The multiplier model is more appropriate for large changes in aggregate demand,

2. Since total expenditures are $2,000, induced expenditures are $1,000.

3. The aggregate expenditures curve shifts down by the decline in autonomous

4. If planned expenditures are below actual production, income will decline. Here’s

how: when planned expenditures are below actual production, firms will see that

5. At levels of output above equilibrium, inventories are increasing because planned

6. The AE curve becomes steeper when the marginal propensity to expend increases.

7. Equilibrium income is

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8. If the mpe is .8, then the value of the

multiplier is 1/.2, or 5. If autonomous

9. a. If the mpe is .66, the value of the multiplier is

b. This is demonstrated in the accompanying

10. If withdrawals were immediately translated into expenditures, the size of the

11. a. Given that the mpe is 0.8 and autonomous investment has risen by $20, income

b. With an mpe of 0.5, the multiplier is now (1/.5), or 2, and so the change in

c. The decrease in exports and increase in investment cancel each other out so that

d. See the graphs below. The graph on the left corresponds to (a) and the graph on

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(a) (b)

12. Given that the mpe is 0.6, I0 = $1,000; G0 = $8,000; C0 = $10,000; and (X0 – M0) =

$1,000, then:

a. Y = $10,000 + .6Y + $1,000 + $8,000 + $1,000.

b. If net exports increase by $2,000, income will increase by $5,000 (the multiplier

c. If the mpe falls from .6 to .5, the multiplier decreases from 2.5 to 2. The answer to

13. Shocks to aggregate expenditures are any sudden changes in factors that affect C,

14. If the mpe is 0.5, then the multiplier is 2. Every $1 increase in autonomous

expenditures will raise income by $2. To close a recessionary gap of $200 the

15. Cutting taxes by $100 has a smaller effect on GDP than increasing expenditures

by the same amount because people don’t spend the entire amount of the tax cut

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16. a. This is shown as a shift down of the AE curve

b. An improvement would be graphically

17. Given that income is $50,000, the mpe is .75:

a. The multiplier is 4.0, calculated as [1/(1 – mpe)]. To generate a $2,000 increase in

b. If the mpe is .67, the multiplier is about 3, which means that to generate a $2,000

c. If the mpe is .5, then the multiplier is 2.0, which means that to generate a $2,000

18. a. If the mpe is .5, the multiplier is 2. Because there is a recessionary gap of $800,

b. If the mpe is .8, the multiplier is 5. Because there is an inflationary gap of $1,500,

c. If the mpe is .2, the multiplier is 1.25. Because there is an inflationary gap of

d. If the mpe is .7, the multiplier is 3.33. Because there is a recessionary gap of

19. a. If the mpe is .5, the multiplier is 2. To eliminate the inflationary gap, the

government should undertake a contractionary fiscal policy. Since the economy is

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b. The multiplier now becomes 5, so we would advise decreasing government

20. A circular flow diagram of the economy that would more accurately describe the

21. A mechanistic model states the equilibrium independent of where the economy

22. In the multiplier model, the effects are for a continued change in an exogenous

variable. If there were only a one-time change, the effects of each successive

23. In the multiplier-accelerator model, changes in output are accelerated because

changes in investment depend on changes in income rather than on the level of

24. If it is true that people base their spending primarily on lifetime income, not

yearly income, the marginal propensity to consume out of changes in current

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Questions from Alternative Perspectives

1. Austrian

His work points out that people are not dumb; they figure out ways to make things

2. Feminist

From today’s perspective, this statement seems extremely biased against women, but

3. Institutionalist

While each option will cause aggregate expenditures to shift up and thus stimulate

GDP in the short-term, each will have different implications for the economy’s

4. Radical

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5. Post-Keynesian

Issues to Ponder

1. In 2016, the government budget was in deficit, but because of a sequester, the

United States was running a smaller deficit than previously. However, the deficit

was expected to rise in the coming years because Congress and the President

2. The effects of this invention on the economy would be manifold and in many

ways unpredictable because such major shocks have social, institutional, and

political effects, as well as economic effects. The obvious effect is that the

3. If there is a delay, it will mean that the initial multiplier effects can be small or

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