Aggregate Aggregate Real Domestic Expenditures, Output, (GDPPrivate Closed Billi

Question

Aggregate Aggregate Real Domestic Expenditures, Output, (GDPPrivate Closed Billions Imports, Billions et Exports, Expenditures, Private Open Economy, Billions $300 $340 S380 DI), Billions | Economy, Billions 5290 $330 370 $410 $450 S490 S530 $570 $30 $30 $30 $30 $30 $30 $30 S30 $10 S10 $10 $10 $10 $10 510 510 $300 350 $400 $450 $20 520 $460 $500 $540 $580 $550 Instructions: Round your answer to the nearest whole number Incorporate government into the table by assuming that it plans to tax and spend $26 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate expenditures schedule What is the change in equilibrium GDP caused by the addition of government? billion

Explanation / Answer

MPC = change in aggregate expenditure closed / change in real domestic output

= 40/50 = 0.8

Change in equilibrium GDP = 1/(1-MPC)* (-T + G)

= 1/(1-0.8)*(-0.8*26 + 26)

= 5* ( - 20.8 + 26)

= 26 billion

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