Refer to the table on the next page in answering the...

Refer to the table on the next page in answering the questions that follow: a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? Explain. What is the multiplier in this example? b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is 500 billion dollar? Explain the consequences. By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example? c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? (GRAPH CAN'T COPY)

Refer to the table on the next page in answering the questions that follow:
a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? Explain. What is the multiplier in this example?
b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is 500 billion dollar? Explain the consequences. By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example?
c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier? (GRAPH CAN'T COPY)

Key Concepts

Full Employment

This concept refers to the level of output at which all available resources in an economy are being used efficiently. Full employment does not mean zero unemployment, but rather that any remaining unemployment is frictional or structural. It sets the benchmark level of GDP, against which deviations are measured to determine whether there is an economic gap that could lead to inflation or recession.

Expenditure Gap

An expenditure gap occurs when the actual or planned aggregate expenditures differ from the level of output corresponding to full employment. An inflationary expenditure gap arises when actual spending exceeds the full employment level, potentially leading to upward pressure on prices, while a recessionary expenditure gap occurs when spending is below the full employment level, possibly resulting in unemployment and idle resources.

Aggregate Expenditures

This is the total spending in the economy on final goods and services at a given level of income. It includes consumption, investment, government spending, and net exports. The aggregate expenditures schedule is crucial in determining equilibrium income; any deviation from it relative to full employment output can indicate an expenditure gap.

Multiplier Effect

The multiplier effect describes how an initial change in spending leads to a larger overall change in national income. It arises because one person’s spending becomes another person’s income, inducing further consumption. The size of the multiplier depends on the marginal propensities to consume and save, and it is key to understanding how changes in aggregate expenditures can close expenditure gaps.

Marginal Propensity to Consume (MPC)

The MPC is the fraction of additional income that a household consumes rather than saves. It determines the extent to which an increase in income will boost consumer spending, which in turn affects the multiplier. A higher MPC means that more of each additional dollar is spent, leading to a larger multiplier effect.

Marginal Propensity to Save (MPS)

The MPS is the fraction of additional income that is saved rather than spent. It is the complement to the MPC and is crucial in the calculation of the multiplier. Since the multiplier is inversely related to the MPS, a smaller MPS (or higher MPC) results in a larger multiplier effect, amplifying the impact of changes in spending on overall economic output.

Transcript

00:01 For problem 13, we are given a table with possible levels of employment in millions, real domestic outputs in billions, and aggregate expenditures in billions.

00:12 The first part of the question says, if all employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? so here there will be a recessionary expenditure gap because real domestic outputs of 700 ,000.

00:32 Billion is greater than aggregate expenditures of 680 billion.

00:37 Thus there is a low demand in this economy.

00:41 The second part of the question says what will be the consequence of this gap? so since there is low demand in this economy we know that prices will go down and hence unemployment will rise.

00:56 By how much would aggregate expenditures in column 3 have to change at each level of gdp to eliminate this recessionary expenditure gap.

01:07 So i rate expenditures have to rise by 20 billion at each level of gdp because 680 billion plus 20 billion is equal to 700 and that equals our real domestic output.

01:26 And the last question to question a says what is the multiplier in this example? so the formula for the multiplier, as you can see, it's 1 divided by 1 minus our mpc, and our marginal propensity to consume is equal to the change in aggregate expenditure divided by the change in y.

01:48 And the change in the expenditures are constant at 40 billion, because 560 minus 520 is 40, and 600 minus 560 is also 40.

02:01 And the changes in real domestic outputs is also constant at 50 billion because 550 minus 500 is 50 and 600 minus 50 it's also 50 so the mpc is equal to 40 divided by 50 which is 0 .8 and substituting this into our multiplier formula we get a multiplier of 5 so a one unit change in investment or consumption or government spending or net export would lead to a five -minute change in real domestic output.

02:40 Moving on to question b...

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