Download chapter 23 - the short-run macro model

CHAPTER 23 - THE SHORT-RUN MACRO MODEL
PROBLEM SET
2.
a.
Real GDP
$0
$100
$200
$300
$400
$500
$600
b.
Real GDP
$0
$100
$200
$300
$400
$500
$600
c.
Autonomous
Consumption
$30
$30
$30
$30
$30
$30
$30
Consumption
Spending
$30
$115
$200
$285
$370
$455
$540
Planned
Investment
$40
$40
$40
$40
$40
$40
$40
MPC x Disposable
Income
$0
$85
$170
$255
$340
$425
$510
Government
Spending
$20
$20
$20
$20
$20
$20
$20
Consumption =
Autonomous
Consumption +
(MPC x Disposable
Income)
$30
$115
$200
$285
$370
$455
$540
Net Exports
-$15
-$15
-$15
-$15
-$15
-$15
-$15
Aggregate
Expenditures
$75
$160
$245
$330
$415
$500
$585
Chapter 23 The Short-Run Macro Model
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 will
expand. This is because aggregate expenditure ($245 billion) is greater than real GDP
($200 billion), so firms find their inventories falling, and will expand output, leading
to a higher real GDP in the future.
f. If planned investment falls to $25 billion, the equilibrium level of real GDP will fall
from $500 billion to $400 billion.
4.
a. Inventories will fall unexpectedly, sending firms a signal to produce more output.
GDPA is not sustainable because the extra production will move the economy to the
right along the horizontal axis.
b. Inventories will rise unexpectedly, sending firms a signal to produce less output.
GDPB is not sustainable because cut in production will move the economy to the left
along the horizontal axis.
Chapter 23 The Short-Run Macro Model
6.
a. Real GDP and total employment will increase.
b. Real GDP and total employment will increase.
c. Real GDP and total employment will decrease.
8.
a. In the table in Problem 1, the second column (C) would be affected; each number in
the column would become smaller, since households would spend less at each level of
income.
b. The change in saving is the vertical distance between the two aggregate expenditure
lines.
c.
Real
Aggregate
Expenditure
(C + I + NX) 1
(C + I + NX) 2
45°
Y2
Y1
Real
GDP
10. a. If the MPC is 0.95, then the expenditure multiplier is 20. Therefore, the change in real
GDP is 20 x $7,500 = $150,000.
b. If the MPC is 0.65, then the expenditure multiplier is 2.86. Therefore, the change in
real GDP is 2.86 x -$300,000 = -$857,143.
Chapter 23 The Short-Run Macro Model
c. If the MPC is 0.75, then the expenditure multiplier is 4. Therefore, the change in real
GDP is 4 x -$5 billion = -$20 billion.
12.
Additional
increase in I
Round
Initial Increase in Investment Spending
2
3
4
5
1000
90
62
43
30
Additional
Spending in
each round
Total
Additional
Spending
1000
690
476
329
227
The final change in GDP would be higher than $2,500 billion, because further rises in
investment act as a de-stabilizer, thus increasing the multiplier.
MORE CHALLENGING QUESTIONS
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) = 5,700.
Therefore, in equilibrium, we have aggregate expenditure = C + IP + G + NX = 5,700 +
600 + 700 + 200 = 7,200, which is equal to equilibrium real GDP.
16.
S + T,
I + G + NX
S+ T
I 2 + G + NX
I 1 + G + NX
0
Y1
Y2
Real
GDP
The two lines cross at the equilibrium output level, where S + T = IP + G + NX. If
investment spending increased, the IP + G + NX line would shift upward. The new
crossing point would occur at a higher level of real GDP, so equilibrium real GDP would
increase.
1000
1690
2166
2495
2721