Exam 11: The Aggregate Expenditures Model

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Equilibrium occurs where C + I_g = GDP.There is a direct relationship between aggregate expenditures and the level of GDP,but they are equal only where the AE schedule intersects the 45-degree line,which shows equality of expenditures and GDP.Where aggregate expenditures exceed GDP,the AE line is above the 45-degree line and output will continue to expand.If aggregate expenditures fall below GDP as would occur at levels above 600,then GDP will contract until the expenditures-output equality is restored.
The 45-degree line in the aggregate expenditures model represents all of the points where aggregate expenditures are equal to real GDP;all of the possible equilibrium levels.

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(a)The marginal propensity to consume is .8,the marginal tax rate is .25,and the marginal propensity to import is .1.
(b)The saving function is S = -100 + .2Y_d.
(c)The aggregate expenditure function is AE = 182 + .5Y.Autonomous expenditure is $182.The marginal propensity to withdraw is .5.
(d)The equilibrium level of real GDP is $364.
(e)The multiplier is 2 (1/.5).
(f)A recessionary gap of $16 exists ($380 - $364).To eliminate the gap,the government must increase its expenditures by $8,which will be multiplied by 2.

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(a)Assuming that investment,net exports,government expenditures,and taxes do not change with changes in real GDP,what are the sizes of the MPC,the MPS,and the multiplier?
(b)If full employment in this economy is 65 million,will there be an inflationary or recessionary gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.
(c)Will there be an inflationary or recessionary gap if the full-employment level of output is $250 billion? Explain the consequences.By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary or recessionary gap? Explain.
(a)MPC = .8 ($20/$25);MPS = .2 (1 - .8);multiplier = 5 (1/.2).
(b)A recessionary gap exists.Equilibrium GDP is $300 billion,while full employment GDP is $350 billion.Employment will be 10 million less than at full employment.Aggregate expenditures would have to increase by $10 billion ($350 - $340)at each level of GDP to eliminate the recessionary gap.
(c)An inflationary gap exists.Aggregate expenditures will be excessive,causing demand-pull inflation.Aggregate expenditures would have to fall by $10 billion ($260 - $250)at each level of GDP to eliminate the inflationary gap.