Chapter 32 Appendix
32A-1
Chapter 32 Appendix
McConnell Brue and Flynn 21e
DISCUSSION QUESTIONS
1. Explain carefully: “A change in the price level shifts the aggregate expenditures curve but not
the aggregate demand curve.” LO7
2. Suppose that the price level is constant and that investment decreases sharply. How would you
show this decrease in the aggregate expenditures model? What would be the outcome for real
GDP? How would you show this fall in investment in the aggregate demand–aggregate supply
model, assuming the economy is operating in what, in effect, is a horizontal section of the
aggregate supply curve? LO7
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REVIEW QUESTIONS
1. True or False: A higher price level increases aggregate expenditures. LO7
Answer: False
AE
P
Y
Y
P1
Q1
AE1 (P1)
AS
AD1
AE2 (P1)
AD2
Q2
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2. If the government decreases expenditures, the AE curve will shift _______ and the AD curve
will shift _______. LO7
a. Down; left.
b. Down; right.
c. Up; left.
d. Up; right.
PROBLEMS
1. Refer to Figure 1a and 1b in the Appendix. Assume that Q1 is 300, Q2 is 200, Q3 is 100, P3 is
120, P2 is 100, and P1 is 80. If the price level increases from P1 to P3 in graph (b), in what
direction and by how much will real GDP change? If the slopes of the AE lines in Figure 1a are .8
and equal to the MPC, in what direction will the aggregate expenditures schedule in Figure 1a
need to shift to produce the previously determined change in real GDP? What is the size of the
multiplier in this example? LO7
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Feedback:
Real GDP will fall (movement along the AD schedule and a shift downward of the AE
schedule). The decrease in real GDP will be 200 (Q1 – Q3 = 300 – 100 = 200).
If the slopes of the AE lines in graph (a) are .8 and equal to the MPC, in what direction
will the aggregate expenditures schedule in graph (a) need to shift to produce the
previously determined change in real GDP? What is the size of the multiplier in this
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First, we note that the change in output is an increase of $100 (Q2 – Q1 = $500 – $400).
Second, given the MPC is 0.75 the multiplier is 4 (= 1 / (1-MPC) = 1 / (1-0.75) = 1 / 0.25
= 4).
Thus, the AE curve must increase by $25 since the total decrease in output is $100.
To see this, note that an increase in AE by $25 with a multiplier of 4 is $100 (= 4 x $25).
Change in real GDP = multiplier x change in AE
Rearranging this equation,
Change in AE = change in real GDP/multiplier
Using the values above, the change in AE equals $100/4 = $25.
Given the multiplier, what must be the distance between AD1 and the broken line to its
right at P1?
This distance is the initial shift following the increase in expenditure by $25 (the shift in
the AE curve). Thus, the answer is $25 (this is before the multiplier process works its
way through the economy).