Assume that in each round, real GDP Is equal to aggregate expenditure In the pre

Question

Assume that in each round, real GDP Is equal to aggregate expenditure In the previous round. So if aggregate expenditure was $725 billion In round 1, then you can assume that real GOP Is $725 billion In round 2. Shift the vertical green line In the calculator to the right so that It lines up with $725 billion. At this level of real GDP, aggregate expenditure now equals $745 billion, which means that aggregate expenditure Is now $20 billion greater than real GDP in round 2 and $45 billion greater than the Initial real GDP. These numbers are shown as"New Spending This Round" and"Cumulative New Spending," respectively, in the following table. Because real GDP increased by $25 billion between round 1 and round 2, and because aggregate expenditure only increased by $20 billion, it must be the case that new saving of $5 billion was generated in round 2. This new saving is shown in the last two columns of the table. Repeat the process for round 3: Enter real GDP, aggregate expenditure, new spending (the amount by which aggregate expenditure exceeds real GDP in round 3), cumulative new spending (the amount by which aggregate expenditure exceeds the initial real GDP of $ 700 billion), new saving (the amount of the increase in real GDP from round 2 that does not go to new spending), and cumulative new saving (the sum of saving in rounds 2 and 3). Suppose this process continued on and on. In the last line of the table, enter the final values of real GDP, aggregate expenditure, cumulative new spending, and cumulative new saving achieved once the multiplier process is complete (technically, after an infinite number of rounds).

Explanation / Answer

Aggregate

Expenditure

New Spending

This round

Cummulative

New Spending

New Saving

This round

Cummulative

New Spending

Round Real GDP

Aggregate

Expenditure

New Spending

This round

Cummulative

New Spending

New Saving

This round

Cummulative

New Spending

1 700 725 25 25 - - 2 725 745 20 45 5 5 3 745 760 15 60 5 10

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