Exercise Set 11.2
THE MULTIPLIER


I. Objectives


II. Data

Assumptions

Steps


III. Questions

Let a = 14000, b = 0.75. Further, assume that I = 800, G = 1000, X-IM = 300, T = 600.
  1. Obtain the equation for consumption (in terms of GDP): C = ________________________________.
  2. Obtain the equation for aggregate expenditure (in terms of GDP): AE = ________________________________.
  3. Obtain the equilibrium values of the endogenous variables (show your calculations): GDP = ____________, DI = _____________, C = __________, S = ________________.
  4. Sketch the income-expenditure diagram.
    1. Indicate the intercepts and slope of the C-line and AE-line.
    2. Indicate the eqbm values of GDP and consumption on the graph.
  5. Suppose private firms increase their spending on capital goods by 10%.
    1. The new value of I is ______________.
    2. Obtain the new equilibrium values of the endogenous variables:  GDP = ____________, DI = _____________, C = __________, S = ________________.
    3. Sketch the corresponding changes in the income-expenditure diagram.
    4. Compute the value of the investment multiplier: Investment Multiplier = _______________.
  6. Obtain the value of 1/MPS. The investment multiplier is [ greater than | less than | equal to ] 1/MPS.
  7. Compute the government spending multiplier: Government multiplier = _______________________.
  8. The government multiplier is [ greater than | less than | equal to ] 1/MPS.
  9. Increase taxes by 100. 
    1. Compute the corresponding change in GDP. 
    2. Calculate the tax multiplier: Tax multiplier = __________.
  10. The tax multiplier is [ greater than | less than | equal to ] 1/MPS.
  11. The government spending multiplier is [ greater than | less than | equal to ] the tax multiplier. Why?
  12. Compute the export multiplier: Export Multiplier = _______________.
  13. Which of the following will have the smallest impact on GDP? Why?
    1. Exports increase by 200.
    2. Government spending increases by 200.
    3. Taxes are reduced by 200.

Video: Solution to Section III Questions at
http://www.screencast.com/t/NDrJj9A3y