How do we calculate the effects of real GDP on consumption expenditure and imports by using the marginal propensity to consume and the marginal propensity to import?. The effects of real
Trang 1W H AT I S E C O N O M I C S ? 1 9 1
A n s w e r s t o t h e
R e v i e w Q u i z z e s
Page 307 (page 715 in Economics)
1 Which components of aggregate expenditure are influenced by real GDP?
Consumption expenditure and imports are influenced by real GDP Both increase when real GDP increases
2 Define and explain how we calculate the marginal propensity to consume and the marginal propensity to save
The marginal propensity to consume is the proportion of an increase in disposable income that is consumed In terms of a formula, the marginal propensity to
consume, or MPC, can be calculated as C/YD, where means “change in.” The
marginal propensity to save is the proportion of an increase in disposable income
that is saved In terms of a formula, the marginal propensity to save, or MPS, can
be calculated as S/YD
3 How do we calculate the effects of real GDP on consumption expenditure and imports by using the marginal propensity to consume and the marginal
propensity to import?
The effects of real GDP on consumption expenditure and imports are determined respectively by the marginal propensity to consume and the marginal propensity
to import In particular, the effect of a change in real GDP on consumption
expenditure equals the marginal propensity to consume multiplied by the change
in disposable income Similarly, the effect of a change in real GDP on imports equals the marginal propensity to import multiplied by the change in real GDP
Page 311 (page 719 in Economics)
1 What is the relationship between aggregate planned expenditure and real GDP at equilibrium expenditure?
Equilibrium expenditure occurs when aggregate planned expenditure equals real GDP
2 How does equilibrium expenditure come about? What adjusts to achieve equilibrium?
Equilibrium expenditure results from adjustments in real GDP For instance, if aggregate planned expenditure exceeds real GDP, firms find that their inventories
1 1
EXPENDITURE MULTIPLIERS**
191
Trang 21 9 2
are below their targets In response, firms increase production to meet their
inventory targets, As production increases, real GDP increases The increase in real GDP increases aggregate planned expenditure but by less than the increase in real GDP Eventually real GDP increases sufficiently so that it equals aggregate planned expenditure and, at that point, equilibrium expenditure occurs
3 If real GDP and aggregate expenditure are less than equilibrium expenditure, what happens to firms’ inventories? How do firms change their production? And what happens to real GDP?
If real GDP and aggregate expenditure are less than their equilibrium levels, an unplanned decrease in inventories occurs The unplanned decrease in inventories leads firms to increase production to restore inventories to their planned levels The increase in production increases real GDP
4 If real GDP and aggregate expenditure are greater than equilibrium
expenditure, what happens to firms’ inventories? How do firms change their production? And what happens to real GDP?
If real GDP and aggregate expenditure are greater than their equilibrium levels, an unplanned increase in inventories occurs The unplanned increase in inventories leads firms to decrease production to restore inventories to their planned levels The decrease in production decreases real GDP
Page 316 (page 724 in Economics)
1 What is the multiplier? What does it determine? Why does it matter?
The multiplier is the amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure and real GDP A change in autonomous expenditure changes real GDP by an amount determined
by the multiplier The multiplier matters because it tells us how much a change in autonomous expenditure changes equilibrium expenditure and real GDP
2 How do the marginal propensity to consume, the marginal propensity to import, and the income tax rate influence the multiplier?
The marginal propensity to consume, the marginal propensity to import, and the income tax rate all influence the magnitude of the multiplier The multiplier is smaller when the marginal propensity to consume is smaller, when the marginal propensity to import is larger, and when the income tax rate is larger
3 How do fluctuations in autonomous expenditure influence real GDP?
Fluctuations in autonomous expenditure bring business cycle turning points When autonomous expenditure changes, the economy moves from one phase of the business cycle to the next For example, if autonomous expenditure decreases, equilibrium expenditure and real GDP decrease and, as a result, the economy enters the recession phase of the business cycle
Page 321 (page 729 in Economics)
1 How does a change in the price level influence the AE curve and the AD
curve?
A change in the price level shifts the AE curve and creates a movement along the
AD curve.
2 If autonomous expenditure increases with no change in the price level, what
happens to the AE curve and the AD curve? Which curve shifts by an amount
that is determined by the multiplier and why?
A change in autonomous expenditure with no change in the price level shifts both
the AE curve and the AD curve The AE curve shifts by an amount equal to the
change in autonomous expenditure The multiplier determines the magnitude of
192
Trang 3W H AT I S E C O N O M I C S ? 1 9 3
the shift in the AD curve The AD curve shifts by an amount equal to the change in
autonomous expenditure multiplied by the multiplier
3 How does an increase in autonomous expenditure change real GDP in the short run? Does real GDP change by the same amount as the change in
aggregate demand? Why or why not?
In the short run, an increase in aggregate expenditure increases real GDP
However, the increase in real GDP is less than the increase in aggregate demand
because the price level rises The more the price level rises (the steeper the SAS
curve) the smaller the increase in real GDP
4 How does real GDP change in the long run when autonomous expenditure increases? Does real GDP change by the same amount as the change in aggregate demand? Why or why not?
In the long run, an increase in aggregate expenditure has no effect on real GDP, that is, real GDP does not change The change in real GDP—zero—is less than the change in aggregate demand The change in real GDP is nil because, in the long run, the economy returns to its full-employment equilibrium In the long run, an increase in aggregate expenditure raises the price level but has no effect on real GDP
Page 327 (page 735 in Economics)
In an economy, autonomous consumption expenditure is $50 billion, investment is
$200 billion, and government expenditure is $250 billion The marginal propensity
to consume is 0.7 and net taxes are $250 billion Exports are $500 billion and imports are $450 billion Assume that net taxes and imports are autonomous and the price level is fixed
a What is the consumption function?
The consumption function is the relationship between consumption expenditure and disposable income, other things remaining the same In this case the
consumption function is C = 50 + 0.7(Y – 250) where the “50” is $50 billion and
the “250” is $250 billion
b What is the equation of the AE curve?
The equation of the AE curve is AE = 375 + 0.7Y, where Y is real GDP and the 375
is $375 billion Aggregate planned expenditure is the sum of consumption
expenditure, investment, government purchases, and net exports Using the
symbol AE for aggregate planned expenditure, aggregate planned expenditure is
AE = 50 + 0.7(Y – 250) + 200 +250+ 50
AE = 50 + 0.7Y – 175 + 200 + 250 + 50
AE = 375 + 0.7Y
c Calculate equilibrium expenditure
Equilibrium expenditure is $1,250 billion Equilibrium expenditure is the level of aggregate expenditure that occurs when aggregate planned expenditure equals
real GDP That is, AE = 375 + 0.7Y and AE = Y Solving these two equations for Y
gives equilibrium expenditure of $1,250 billion
d Calculate the multiplier
The multiplier equals 1/(1 the slope of the AE curve) The equation of the AE curve tells us that the slope of the AE curve is 0.7 So the multiplier is 1/(1 0.7), which is 3.333
193
Trang 41 9 4
e If investment decreases to $150 billion, what is the change in equilibrium expenditure?
Equilibrium real expenditure decreases by $166.67 billion From part d the
multiplier is 3.333 The change in equilibrium expenditure equals the change in investment, $50 billion, multiplied by 3.333
f Describe the process in part (e) that moves the economy to its new
equilibrium expenditure
When investment decreases by $50 billion, aggregate planned expenditure is less than real GDP Firms find that their inventories are accumulating above target levels As a result, they decrease production to reduce inventories Real GDP decreases The decrease in real GDP decreases disposable income so that
consumption expenditure falls In turn, the decrease in consumption expenditure leads to a further decrease in aggregate planned expenditure Real GDP still exceeds aggregate planned expenditure though by less than was initially the case Nonetheless unwanted inventories are still accumulating and firms continue to cut production, further reducing real GDP This process continues until eventually real GDP will decrease enough to equal aggregate planned expenditure
194
Trang 5A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d
A p p l i c a t i o n s
1 In an economy, when income increases from $400 billion to $500 billion, consumption expenditure changes from $420 billion to $500 billion Calculate the marginal propensity to consume, the change in saving, and the marginal propensity to save
The marginal propensity to consume is the fraction of a change in disposable income that is consumed In this economy, when income increases by $100 billion per year, consumption expenditure increases by $80 billion per year The marginal propensity to consume equals $80 billion ÷ $100 billion, or 0.8
Saving equals disposable income minus consumption expenditure Therefore from the $100 billion increase in income, consumption expenditure increased by $80 billion, leaving a $20 billion increase in saving The marginal propensity to save is the fraction of a change in disposable income that is saved In this economy, for the increase in income of $100 billion, saving increases by $20 billion, so the marginal propensity to save is $20 billion ÷ $100 billion, which is 0.2
Use Figure 11.1 to work Problems 2 and 3
Figure 11.1 illustrates the components of
aggregate planned expenditure on Turtle
Island Turtle Island has no imports or
exports, no incomes taxes, and the price level
is fixed
2 Calculate autonomous expenditure and
the marginal propensity to consume
Autonomous expenditure is $2 billion
Autonomous expenditure is expenditure
that does not depend on real GDP
Autonomous expenditure equals the
value of aggregate planned expenditure
when real GDP is zero
The marginal propensity to consume is
0.6 When the country has no imports or
exports and no income taxes, the slope of
the AE curve equals the marginal
propensity to consume When income increases from zero to $6 billion, aggregate planned expenditure increases from $2 billion to $5.6 billion That is, when real GDP increases by $6 billion, aggregate planned expenditure increases by $3.6 billion The marginal propensity to consume is $3.6 billion ÷ $6 billion, which is 0.6
3 a What is aggregate planned expenditure when real GDP is $6 billion?
Figure 11.1 shows that aggregate planned expenditure is $5.6 billion when real GDP is $6 billion
b If real GDP is $4 billion, what is happening to inventories?
Firms’ inventories are decreasing When real GDP is $4 billion, aggregate planned expenditure exceeds real GDP, so firms sell all that they produce and more As a result, inventories decrease
c If real GDP is $6 billion, what is happening to inventories?
Firms are accumulating inventories That is, unplanned inventory investment is positive When real GDP is $6 billion, aggregate planned expenditure is less than real GDP Firms cannot sell all that they produce and inventories pile up
Trang 64 Explain the difference between induced consumption expenditure and
autonomous consumption expenditure Why isn’t all consumption expenditure induced expenditure?
Induced consumption expenditure is consumption expenditure that changes when disposable income changes Autonomous consumption expenditure is consumption expenditure that would occur in the short run even if disposable income was zero Not all consumption expenditure is induced consumption expenditure because, in the short run, even if someone has no income they still will have some
(autonomous) consumption expenditure, if for nothing else, for food
5 Explain how an increase in business investment at a constant price level
changes equilibrium expenditure
Investment is a component of autonomous aggregate expenditure An increase in
investment increases aggregate expenditure so the AE curve shifts upward
Equilibrium expenditure increases
Use the following data to work Problems 6 and 7
An economy has a fixed price level, no imports, and no income taxes MPC is 0.80,
and real GDP is $150 billion Businesses increase investment by $5 billion
6 Calculate the multiplier and the change in real GDP
With no imports and no income taxes, the multiplier equals 1/(1 MPC) So the
multiplier is 1/(1 0.8), which is 5.0 Then the $5 billion increase in investment
increases real GDP by 5.0 × $5 billion, which is $25 billion
7 Calculate the new real GDP and explain why real GDP increases by more than
$5 billion
Real GDP was initially $150 billion The increase in investment increased real GDP
by $25 billion, so real GDP increases to $175 billion Real GDP increases by more
than the initial increase in investment because the increase in investment
increases disposable income which induces additional increases in consumption
expenditure So real GDP increases both because investment increases and also
because of induced increases in consumption expenditure
8 An economy has a fixed price level, no imports, and no income taxes An
increase in autonomous expenditure of $2 trillion increases equilibrium
expenditure by $8 trillion Calculate the multiplier and explain what happens
to the multiplier if an income tax is introduced
The multiplier is defined as the change in equilibrium expenditure divided by the
change in autonomous expenditure In this problem the multiplier equals $8 trillion
÷ $2 trillion which is 4.0
If an income tax is introduced, the multiplier decreases in value With an income
tax, at each spending round less disposable income is created leading to smaller
increases in induced expenditure
Use the following data to work Problems 9 to 13
Suppose that the economy is at full employment, the price level is 100, and the
multiplier is 2 Investment increases by $100 billion
9 What is the change in equilibrium expenditure if the price level remains at
100?
The initial change in equilibrium expenditure is $200 The initial effect of the
increase in investment increases equilibrium expenditure by the change in
investment times the multiplier The multiplier is 2 and the change in investment is
$100 billion, so the initial change in equilibrium expenditure is $200 billion
E X P E N D I T U R E M U LT I P L I E R S 1 4 1
Trang 710.a What is the immediate change in the quantity of real GDP demanded?
The quantity of real GDP demanded increases by $200 billion The increase in
investment shifts the aggregate demand curve rightward by the change in
investment times the multiplier The multiplier is 2 and the change in investment is
$100 billion, so the aggregate demand curve shifts rightward by $200 billion
b In the short run, does real GDP increase by more than, less than, or the same amount as the immediate change in the quantity of real GDP
demanded?
In the short run, real GDP increases by less than $200 billion Real GDP is
determined at the intersection of the AD curve and the SAS curve In the short run,
the price level will rise and real GDP will increase but by an amount less than the
shift of the AD curve.
11 In the short run, does the price level remain at 100? Explain why or why not
In the short run, the price level rises Real GDP is determined at the intersection of
the AD curve and the SAS curve In the short run, the increase in aggregate
demand means that the price level will rise as the economy moves along its
upward-sloping SAS curve.
12.a In the long run, does real GDP increase by more than, less than, or the same
amount as the immediate increase in the quantity of real GDP demanded?
In the long run, real GDP equals potential GDP, so real GDP does not increase Real
GDP is determined at the intersection of the AD curve and the SAS curve After the initial increase in investment, money wages increase, the SAS curve shifts
leftward, and in the long run, real GDP moves back to potential GDP
b Explain how the price level changes in the long run
Real GDP is determined at the intersection of the AD curve and the SAS curve In the long run, money wages increase so the SAS curve shifts leftward, raising the
price level by more than it rose in the short run
13 Are the values of the multipliers in the short run and the long run larger or smaller than 2?
The multiplier in the short run is less than the multiplier of 2 because the short-run increase in real GDP is less than $200 billion The long-run multiplier is even smaller It equals zero
14 Use the data in the Worked Problem on p 325 (page 737 in Economics)
Calculate the change in equilibrium expenditure when investment decreases
by $150 billion
The multiplier equals 4 Consequently the change in equilibrium expenditure equals (4) × (−$150 billion), or a decrease of $600 billion
1 4 2 C H A P T E R 1 1
Trang 8Answers to Additional Problems and Applications
Use the following data to work Problems 15 and 16
You are given the information in the table about the
economy of Australia
15 Calculate the marginal propensity to save
The marginal propensity to save is the fraction of
a change in disposable income that is saved In
Australia, when disposable income increases by
$100 billion per year, saving increases by $25
billion per year The marginal propensity to save is
$25 billion ÷ $100 billion, which is 0.25
16 Calculate consumption at each level of disposable income Calculate the
marginal propensity to consume
The table to the right shows Australia’s
consumption expenditure schedule Consumption
expenditure equals disposable income minus
saving For each increase in disposable income of
$100 billion, consumption expenditure increases
by $75 billion The marginal propensity to
consume is 0.75 The marginal propensity to
consume plus the marginal propensity to save
equals 1 Because the marginal propensity to save
equals 0.25, the marginal propensity to consume
equals 0.75
Use the following news clip to work Problems 17 to 19
Americans $2.4 trillion Poorer
The Federal Reserve reported that household wealth decreased by $2.4 trillion or
$21,000 per household in the third quarter of 2011 This drop is the steepest since
2008 and the second consecutive quarterly drop Foreclosures lowered household debt slightly but credit card debt increased Many households are struggling to buy the essentials and spending on food has decreased Separately, the Bureau of
Economic Analysis reported that consumption expenditure increased by $39 billion
in the third quarter of 2011
Sources: The New American, December 11, 2011 and the Bureau of Economic
Analysis
Disposable
(billions of dollars per
year)
Disposable income Consumption
expenditure (billions of dollars per
year)
E X P E N D I T U R E M U LT I P L I E R S 1 4 3
Trang 917 Explain and draw a graph to illustrate how a fall in household wealth would be
expected to influence the consumption function and saving function
Figure 11.2a shows the effect of a decrease in wealth on the consumption function and Figure 11.2b shows the effect on the saving function Consumption
expenditure decreases so the consumption function shifts downward from CF0 to
CF1 while saving increases so the saving function shifts upward from SF0 to SF1
18 What factors might explain the actual changes in consumption expenditure and wealth that occurred in the third quarter of 2011?
According to the article, consumption increased At least two other factors could explain the discrepancy between the “predicted” decrease in consumption in part
a and the increase that actually occurred First, disposable income might have increased This change would lead to a movement upward along the (downward-shifted) consumption function so that consumption expenditure increased
Alternatively people’s expected future incomes might have risen The upward revision in expected future income would lead to an upward shift of the
consumption function which would offset the fall from the decrease in wealth
19 Draw a graph of a consumption function and show at what points consumers were actually operating in the second and third quarters Make any necessary assumptions and explain your answer
Regardless of any increase in future expected income, it is likely the case that the decrease in wealth led to a net downward shift of the consumption function
because the decrease in wealth was so large In Figure 11.2a the consumption
function shifts downward from CF0 to CF1 Equally likely, however, disposable income increased So the economy moves from disposable income of $10.5 trillion
and consuming at point A on consumption function CF0 to disposable income of
$11.0 trillion and consuming at point B on consumption function CF1
1 4 4 C H A P T E R 1 1
Trang 10A B C D E F G
Use the spreadsheet above, which lists real GDP (Y ) and the components of
aggregate planned expenditure in billions of dollars, to work Problems 20 and 21
20 Calculate autonomous expenditure Calculate the marginal propensity to
consume
Autonomous expenditure equals the value of aggregate planned expenditure when real GDP is zero Because the spreadsheet does not list GDP of zero, we must
extrapolate to calculate the value of consumption expenditure and imports when
GDP equals zero From the spreadsheet, consumption expenditure falls by $60
billion for every $100 billion decrease in GDP So when GDP equals zero,
autonomous consumption expenditure is $50 billion Similarly, from the
spreadsheet, imports decrease by $15 billion for every $100 billion decrease in
GDP So when GDP equals zero, imports equal zero Autonomous expenditure is $50 billion (consumption expenditure) plus $50 billion (investment) plus $60 billion
(government expenditure) plus $60 billion (exports), which equals $220 billion
The marginal propensity to consume is 0.6 When income increases from $100
billion to $200 billion, consumption expenditure increases from $110 billion to
$170 billion A $100 billion increase in GDP increases consumption expenditure by
$60 billion So the marginal propensity to consume is $60 billion ÷ $100 billion,
which is 0.6
E X P E N D I T U R E M U LT I P L I E R S 1 4 5