Aggregate Net Exports, Expenditures, Output, (GDP Billions Private Open $330 $37

Question

Aggregate Net Exports, Expenditures, Output, (GDP Billions Private Open $330 $370 $410 Private Closed DI), Billions $300 $350 $400 $450 $500 $30 S30 S30 $20 $340 $380 $420 $460 S-10 S-10 S-10 $20 53010$450 $490 S-10 S-10 S-10 S-10 $20 $550$540 $20$30 $30 $30 $570 $20 $20 $600 $580 620 610 Instructions: Round your answer to the nearest whole number. Incorporate government into the table by assuming that it plans to tax and spend $14 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 schedute 4 What is the change in equilibrium GDP caused by the addition of government? bilion

Explanation / Answer

Marginal propensity to consume (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*14 + 14)

= 5( -11.2 +14)

= 14 billion

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