Exercise Set 11.2
THE MULTIPLIER

I. Objectives

• To compute equilibrium GDP
• To compute the multiplier

II. Data

Assumptions

• Consumption: C = a + b(DI)
• Investment (I), Government expenditure (G), Net Exports (X-IM), and Taxes (T) are exogenous.

Steps

• Assume values for the parameters a and b.
• Assume values of the exogenous variables (I, G, X-IM and T).
• Solve for equilibrium values of GDP, DI, C and S.
• Compute the investment multiplier.
• Click on Gimme Multiplier! to confirm.

III. Questions

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.