Refer to the accompanying table in answering the questions that follow:If full e
ID: 1191159 • Letter: R
Question
Refer to the accompanying table in answering the questions that follow:If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? Recessionary expenditure gap What will be the consequence of this gap? 20 million shortfall of employment 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? Aggregate expenditures would have to increase What is the multiplier in this example? Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is S400 billion? inflationary Expenditure gap By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? by $ billion. Aggregate expenditures would have to decrease What is the multiplier in this example? 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? Instructions: Round your answers for MPC and MPS to 1 decimal place. MPC = MPS = Multiplier =Explanation / Answer
At 130 million employment level there clearly a recessionary expenditure gap.As real domestic output at this level is > expenditure hence recessionary expenditure gap.
There would be recession in the economy.Aggregate damand falls short by $20 billion.Thus firms would incur lesser investment .This would further translate to lesser no of jobs created in an economy.Thus a higher rate of unemployment.
Aggregate expenditure would have to increase by $20 billion to eliminate this recessionary gap.
Multiplier = 1/(1 - MPC) .Given that all change in expenditure is due to consumption we can easily calculate MPC =change in expenditure / change in real domestic product = 40/50 = 0.8
Therefore multiplier = 1/(1 - 0.8) = 5.
b)At $400 billion there is an inflationary gap of $20 billion.As aggregate expenditure > real domestic output by $20 billion there is an infalationary gap.
Aggregate expenditure would have to decrease by $20 billion to eliminate the inflationary gap.
Multiplier is same = 5.
c)MPC = change in aggregate expenditure / change in real domestic output = 40/50 = 0.8
MPS = 1 - MPC = 1 - 0.8 = 0.2
Multiplier = 1/(1 - MPC) = 5.