Question

5. Will the multiplier effect on GDP be different when these events occur? Why or why not? a) Investment rises by 100; c) Exports rise by 100, b)Consumption rises by 100 at each level of GDP d)Government spending rises by 100 6. In an economy with no government sector, investment is 1,000, net exports are 100, and the consumption schedule is 3,000 3,500 4,000 4,500 5,000 5,500 2,100 2,500 2,900 3,300 3,700 4,100 Calculate the aggregate demand schedule, and find the equilibrium level of GDP. b) What are savings at this equilibrium GDP? c) What is the marginal propensity to consume? d) What is the multiplier? e) People lower their savings and raise their consumption by 200 at each level of GDP. Use the multiplier to find a) the new equilibrium GDP t) Confirm your answer to e) by calculating the new expenditure schedule. g) What is the level of savings at the new equilibrium GDP? h) Compare and explain your answers to b) and g).

Answer 1

5. The multiplier effect on gdp will be same when these events occur.

Change in gdp = multiplier*change in autonomous spending.

Autonomous spending is the spending which does not depend on any variable like interest rate, import propensity or consumption propensity.

When autonomous consumption, investment, exports or government spending increases by 100, gdp increases by the same amount.