question archive 1)If you know that the vertical intercept of AE0 is 362
1)If you know that the vertical intercept of AE0 is 362
Subject:EconomicsPrice:2.84 Bought7
1)If you know that the vertical intercept of AE0 is 362.5 and the vertical intercept of AE1 is 387.5, Use the graph above to answer the following questions:
a)If AE0 is the AE function for that economy, and if the potential level of GDP is 500. is the economy suffering a recessionary or an inflationary gap?
The economy is suffering from recessionary gap since the actual GDP is less than potential GDP
b)What is the MPC, MPS, and the spending multiplier in that economy?
c)Given your answer for a by how much do we need to change the AE to close the gap?
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(a) Curve AE0 intersects the 45-degree line corresponding to $400 billion of real GDP. Thus, the equilibrium level of real GDP is $400 billion.
The potential level of real GDP is $500 billion.
Since the equilibrium level of real GDP is less than the potential level of real GDP. It means the economy is suffering from the recessionary gap.
There is a recessionary gap of $100 billion.
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(b) MPC is the slope of the AE curve.
When real GDP is $400 billion, then AE is $400 billion on the AE0 curve.
When real GDP is $500 billion, then AE is $475 billion on the AE0 curve.
The slope of AE curve = (Change in AE / Change in Real GDP)
=> Slope of AE curve = (475 - 400) / (500 - 400)
=> Slope of AE curve = 75 / 100
=> Slope of AE curve = 0.75
Hence, the MPC is 0.75
MPS + MPC = 1
=> MPS = 1 - MPC
=> MPS = 1 - 0.75
=> MPS = 0.25
Multiplier = 1 / MPS
=> Multiplier = 1 / 0.25
=> Multiplier = 4.
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(c) There is a need to increase the real GDP by $100 billion in order to close the recessionary gap.
=> Change in real GDP = $100 billion.
Spending multiplier = (Change in Real GDP / Change in autonomous expenditure)
=> 4 = ($100 billion / Change in autonomous expenditure)
=> Change in autonomous expenditure = ($100 billion / 4)
=> Change in autonomous expenditure = $25 billion.
There is a need to increase the AE by $25 billion at each level of real GDP.
Hence, AE curve should shift upward from AE0 to AE1.
