Refer to the figures below and assume that Q1 is $300 and Q2 is $600, the price
ID: 1154292 • Letter: R
Question
Refer to the figures below and assume that Q1 is $300 and Q2 is $600, the price level is stuck at P1, and the slopes of the AE lines in Figure (a) are 0.9 and equal to the MPC Aggregate Expenditures Model Aggregate Demand-Aggregate Supply Model AD 45? AD Real domestic output, GOP Real domestic output, GDP Instructions: Enter your answers as positive numbers. a. In what direction and by how much does the aggregate expenditures schedule in Figure (a) need to change to move the aggregate demand curve in Figure (b) from AD1 to AD2? AE needs to LelatoselectD by $ . b. What is the multiplier in this example? c. Given the multiplier, what must be the initial shift in AD1 at P1?Explanation / Answer
ANSWER:
1) Change in real gdp = q2 - q1 = $600 - $300 = $300
multiplier = 1 / ( 1 - mpc) = 1 / ( 1 - 0.9) = 1 / 0.1 = 10
change in ae = change in real gdp / multiplier = $300 / 10 = $30
so the aggregrate expenditure must increase by $30.
2) multiplier as calculated above is 10.
3) the distance is the initial shift following the increase in expenditure by $30 that is the shift in the aggregrate expenditure curve and therefore the answer is $30.