Economics

Michael Parkin

Chapter 28

Expenditure Multipliers - all with Video Answers

Educators

Chapter Questions

Problem 1

In an economy, when income increases from $\$ 400$ billion to $\$ 500$ billion, consumption expenditure changes from $\$ 420$ billion to $\$ 500$ billion. Calculate the marginal propensity to consume, the change in saving, and the marginal propensity to save.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

The figure illustrates the components of aggregate planned expenditure on Turtle Island. Turtle Island has no imports or exports, no incomes taxes, and the price level is fixed.
Calculate autonomous expenditure and the marginal propensity to consume.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 3

The figure illustrates the components of aggregate planned expenditure on Turtle Island. Turtle Island has no imports or exports, no incomes taxes, and the price level is fixed.
a. What is aggregate planned expenditure when real GDP is $\$ 6$ billion?
b. If real GDP is $\$ 4$ billion, what is happening to inventories?
c. If real GDP is $\$ 6$ billion, what is happening to inventories?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

Explain the difference between induced consumption expenditure and autonomous consumption expenditure. Why isn't all consumption expenditure induced expenditure?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

Explain how an increase in business investment at a constant price level changes equilibrium expenditure.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

An economy has a fixed price level, no imports, and no income taxes. $M P C$ is 0.80 , and real GDP is $\$ 150$ billion. Businesses increase investment by $\$ 5$ billion.
Calculate the multiplier and the change in real GDP.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

An economy has a fixed price level, no imports, and no income taxes. $M P C$ is 0.80 , and real GDP is $\$ 150$ billion. Businesses increase investment by $\$ 5$ billion.
Calculate the new real GDP and explain why real GDP increases by more than $\$ 5$ billion.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 8

An economy has a fixed price level, no imports, and no income taxes. $M P C$ is 0.80 , and real GDP is $\$ 150$ billion. Businesses increase investment by $\$ 5$ billion.
An economy has a fixed price level, no imports, and no income taxes. An increase in autonomous expenditure of $\$ 2$ trillion increases equilibrium expenditure by $\$ 8$ trillion. Calculate the multiplier and explain what happens to the multiplier if an income tax is introduced.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 9

Suppose that the economy is at full employment, the price level is 100 , and the multiplier is 2 . Investment increases by $\$ 100$ billion.
What is the change in equilibrium expenditure if the price level remains at 100 ?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

Suppose that the economy is at full employment, the price level is 100 , and the multiplier is 2 . Investment increases by $\$ 100$ billion.
a. What is the immediate change in the quantity of real GDP demanded?
b. In the short run, does real GDP increase by more than, less than, or the same amount as the immediate change in the quantity of real GDP demanded?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

Suppose that the economy is at full employment, the price level is 100 , and the multiplier is 2 . Investment increases by $\$ 100$ billion.
In the short run, does the price level remain at $100 ?$ Explain why or why not.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 12

Suppose that the economy is at full employment, the price level is 100 , and the multiplier is 2 . Investment increases by $\$ 100$ billion.
a. In the long run, does real GDP increase by more than, less than, or the same amount as the immediate increase in the quantity of real GDP demanded?
b. Explain how the price level changes in the long run.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 13

Suppose that the economy is at full employment, the price level is 100 , and the multiplier is 2 . Investment increases by $\$ 100$ billion.
Are the values of the multipliers in the short run and the long run larger or smaller than 2 ?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 14

Use the data in the Worked Problem on $\mathrm{p} .737$ Calculate the change in equilibrium expenditure when investment decreases by $\$ 150$ billion.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 15

You are given the following information about the economy of Australia.
$$\begin{array}{cc}
\text { Disposable income } & \text { Saving } \\
\hline \text { [billions of dollars per year) } \\
\hline 0 & 0 \\
100 & 25 \\
200 & 50 \\
300 & 75 \\
400 & 100
\end{array}$$
Calculate the marginal propensity to save.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 16

You are given the following information about the economy of Australia.
$$\begin{array}{cc}
\text { Disposable income } & \text { Saving } \\
\hline \text { [billions of dollars per year) } \\
\hline 0 & 0 \\
100 & 25 \\
200 & 50 \\
300 & 75 \\
400 & 100
\end{array}$$
You are given the following information about the economy of Australia.
$$\begin{array}{cc}
\text { Disposable income } & \text { Saving } \\
\hline \text { [billions of dollars per year) } \\
\hline 0 & 0 \\
100 & 25 \\
200 & 50 \\
300 & 75 \\
400 & 100
\end{array}$$
Calculate the marginal propensity to save.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

The Federal Reserve reported that household wealth decreased by $\$ 2.4$ trillion or $\$ 21,000$ per household in the third quarter of $2011 .$ This drop is the steepest since 2008 and the second consecutive quarterly drop. Foreclosures lowered household debt slightly but credit card debt increased. Many households are struggling to buy the essentials and spending on food has decreased. Separately, the Bureau of Economic Analysis reported that consumption expenditure increased by $\$ 39$ billion in the third quarter of 2011 Sources: The New American, December 11,2011 , and the Bureau of Economic Analysis
Explain and draw a graph to illustrate how a fall in household wealth would be expected to influence the consumption function and saving function.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 18

The Federal Reserve reported that household wealth decreased by $\$ 2.4$ trillion or $\$ 21,000$ per household in the third quarter of $2011 .$ This drop is the steepest since 2008 and the second consecutive quarterly drop. Foreclosures lowered household debt slightly but credit card debt increased. Many households are struggling to buy the essentials and spending on food has decreased. Separately, the Bureau of Economic Analysis reported that consumption expenditure increased by $\$ 39$ billion in the third quarter of 2011 Sources: The New American, December 11,2011 , and the Bureau of Economic Analysis
What factors might explain the actual changes in consumption expenditure and wealth that occurred in the third quarter of 2011 ?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 19

The Federal Reserve reported that household wealth decreased by $\$ 2.4$ trillion or $\$ 21,000$ per household in the third quarter of $2011 .$ This drop is the steepest since 2008 and the second consecutive quarterly drop. Foreclosures lowered household debt slightly but credit card debt increased. Many households are struggling to buy the essentials and spending on food has decreased. Separately, the Bureau of Economic Analysis reported that consumption expenditure increased by $\$ 39$ billion in the third quarter of 2011 Sources: The New American, December 11,2011 , and the Bureau of Economic Analysis
Draw a graph of a consumption function. Mark the actual points at which consumers were in the second and third quarters. Make any necessary assumptions and explain your answer.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 20

The spreadsheet lists real GDP $(Y)$ and the components of aggregate planned expenditure in billions of dollars.
$$\begin{array}{|c|c|c|c|c|c|c|c|}
\hline & \mathrm{A} & \mathrm{B} & \mathrm{C} & \mathrm{D} & \mathrm{E} & \mathrm{F} & \mathrm{G} \\
\hline 1 & & \mathrm{Y} & \mathrm{C} & 1 & \mathrm{G} & \mathrm{X} & \mathrm{M} \\
\hline 2 & \mathrm{A} & 100 & 110 & 50 & 60 & 60 & 15 \\
\hline 3 & \mathrm{B} & 200 & 170 & 50 & 60 & 60 & 30 \\
\hline \mathbf{4} & \mathrm{C} & 300 & 230 & 50 & 60 & 60 & 45 \\
\hline 5 & \mathrm{D} & 400 & 290 & 50 & 60 & 60 & 60 \\
\hline 6 & E & 500 & 350 & 50 & 60 & 60 & 75 \\
\hline 7 & F & 600 & 410 & 50 & 60 & 60 & 90 \\
\hline
\end{array}$$
Calculate autonomous expenditure. Calculate the marginal propensity to consume.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 21

The spreadsheet lists real GDP $(Y)$ and the components of aggregate planned expenditure in billions of dollars.
$$\begin{array}{|c|c|c|c|c|c|c|c|}
\hline & \mathrm{A} & \mathrm{B} & \mathrm{C} & \mathrm{D} & \mathrm{E} & \mathrm{F} & \mathrm{G} \\
\hline 1 & & \mathrm{Y} & \mathrm{C} & 1 & \mathrm{G} & \mathrm{X} & \mathrm{M} \\
\hline 2 & \mathrm{A} & 100 & 110 & 50 & 60 & 60 & 15 \\
\hline 3 & \mathrm{B} & 200 & 170 & 50 & 60 & 60 & 30 \\
\hline \mathbf{4} & \mathrm{C} & 300 & 230 & 50 & 60 & 60 & 45 \\
\hline 5 & \mathrm{D} & 400 & 290 & 50 & 60 & 60 & 60 \\
\hline 6 & E & 500 & 350 & 50 & 60 & 60 & 75 \\
\hline 7 & F & 600 & 410 & 50 & 60 & 60 & 90 \\
\hline
\end{array}$$
a. What is aggregate planned expenditure when real GDP is $\$ 200$ billion?
b. If real GDP is $\$ 200$ billion, explain the process that moves the economy toward equilibrium expenditure.
c. If real GDP is $\$ 500$ billion, explain the process that moves the economy toward equilibrium expenditure.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 22

As a result of slower economic growth and higher loan rates, local sales of Maruti Suzuki India l.imited fell 7.8 percent in June from last year. Consequently, the largest car maker in India has asked as many as 450 contract workers to go on "long leave", or leave without pay, as an effort to cut production and reduce inventory levels at its dealerships. Source: $M i n t,$ July 9,2013
Explain how a rise in unplanned inventory causes firms to change their production.

Xiaomin Bian

Numerade Educator

Problem 23

In an attempt to stimulate the economy, the Union Government announced a $\$ 23.9$ billion increase in its planned expenditure in the annual budget.
Source: CNBC, March 19, 2015
If the slope of the $A E$ curve is $0.6,$ calculate the immediate change in aggregate planned expenditure and the change in real GDP in the short run if the price level remains unchanged.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 24

President Obama's proposal to jolt a listless recovery with $\$ 180$ billion worth of tax breaks and transportation projects left economists largely unimpressed Tuesday. Source: $U S A$ Today, September 10,2010
If taxes fall by $\$ 90$ billion and the spending on transport projects increases by $\$ 90$ billion, which component of Obama's recovery plan would have the larger effect on equilibrium expenditure, other things remaining the same?

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 25

The BEA reported that in the third quarter of 2014
U.S. exports increased by $\$ 40$ billion.
Explain and draw a graph to illustrate the effect of an increase in exports on equilibrium expenditure in the short run.
Explain and draw a graph to illustrate the effect of an increase in exports on equilibrium expenditure in the short run.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 26

The BEA reported that in the third quarter of 2014
U.S. exports increased by $\$ 40$ billion.
Explain and draw a graph to illustrate the effect of an increase in exports on equilibrium real GDP in the short run.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 27

The BEA reported that in the third quarter of 2014
U.S. exports increased by $\$ 40$ billion.
Explain and draw a graph to illustrate the effect of an increase in exports on equilibrium real GDP in the long run.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 28

The BEA reported that in the third quarter of 2014
U.S. exports increased by $\$ 40$ billion.
Compare the multiplier in the short run and the long run and explain why they are not identical.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 29

Japanese economy has staged an encouraging comeback in the first quarter. The growth in GDP has been driven by private consumption that had remained long an obstacle in the country's economic recovery whereas capital expenditure has risen for the first time in four quarters.
Source: CNBC, May 19, 2015
Is capital expenditure part of induced expenditure or autonomous expenditure? Explain.

Andrew Davis

Numerade Educator

Problem 30

Japanese economy has staged an encouraging comeback in the first quarter. The growth in GDP has been driven by private consumption that had remained long an obstacle in the country's economic recovery whereas capital expenditure has risen for the first time in four quarters.
Source: CNBC, May 19, 2015
Examine how Japan's real GDP increases due to a movement along the aggregate demand curve and a shift in the aggregate demand curve. Illustrate your answer using a graph.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 31

Japanese economy has staged an encouraging comeback in the first quarter. The growth in GDP has been driven by private consumption that had remained long an obstacle in the country's economic recovery whereas capital expenditure has risen for the first time in four quarters.
Source: CNBC, May 19, 2015
Explain using a graph how in the Keynesian model, keeping the price level fixed, an increase in private consumption influences aggregate expenditure and aggregate demand.

Andrew Davis

Numerade Educator

Problem 32

In Japan, consumer prices slid at a faster pace in July and industrial production unexpectedly slumped. Source: Bloomberg, September 1,2012
Contrast what the news clip says is happening in Japan with what is happening in the United States in Problem 29 and provide a graphical analysis of the differences.

Andrew Davis

Numerade Educator

Problem 33

After you have studied Economics in the News on
pp. $692-693,$ answer the following questions.
a. If the 2014 changes in inventories were mainly planed changes, what role did they play in shifting the $A E$ curve and changing equilibrium expenditure? Use a two-part figure (similar to that on $\mathrm{p} .718$ ) to answer this question.
b. The BEA news release reports that exports of goods and services were up 10.1 percent and imports of goods and services were up 11.0 percent. Were these increases in expenditure increases in autonomous expenditure or increases in induced expenditure, and how do they influence the magnitude of the multiplier?
c. Using the assumptions made in Fig. 2 on
P. 731 , what is the value of the autonomous expenditure multiplier?

Heather Duong

Numerade Educator

Problem 34

In an economy with a fixed price level, autonomous spending is $\$ 20$ trillion and the slope of the $A E$ curve is 0.6
a. What is the cquation of the $A E$ curve?
b. Calculate equilibrium expenditure.
c. Calculate the multiplier.
d. Calculate the shift of the aggregate demand curve if investment increases by $\$ 1$ billion.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator