a)If the marginal propensity to consume is 0.5 and the marginal propensity to import is 0.3, what is the size of the multiplier and by how much does an $11 billion decrease in autonomous expenditure decrease real GDP?
b)How would an $11 billion decrease in autonomous expenditure shift the aggregate demand curve and by how much would the multiplier effect shift it?
Economic Analysis 0 Figure I shows the impact of China's slower growth on its imports from AustraliaAustralia's exports to Chinawhich in the rst quarter of 20l 5 were running at a quarterly rate of $7.5 billion lower than their peak at the end of 20l3. 0 Lower exports hit business prots and condence, which in turn bring a decrease in investment. 0 Figure 2 shows that from a peak in mid2O l 3 to the end of 20l4, private investment fell by $3.3 billion per quarter. 0 Exports and investment are components of autonomous expenditure. And a decrease in autonomous expenditure decreases aggregate planned expenditure and shifts the AE curve downward. 0 Figure 3 illustrates expenditure equilibrium in two situations. 0 In Figure 3, the curve AEo shows what aggregate planned expenditure would have been in 20|4 with no decrease in exports to China and private investment. 0 Equilibrium real GDP would have been $420 billion (quarterly rate). 0 The curve AEI shows aggregate planned expenditure in 20 I4 with the decrease in exports to China and private investment. AE. is $| l billion below AEO. 0 Equilibrium real GDP in 20|4 is $398 billion, which is $22 billion less than it would have been without the fall in exports and investment. 0 The expenditure multiplier in Figure 3 is 2: A decrease in autonomous expenditure of $l | billion decreases real GDP by $22 billion. Exprts to China (billions of dollars per quarter) 28 ........................................ 26 ...................................... 24 ...................................... 22 ________ Exports to China _____ fall by $7.5 billion 20 ......... per quarter ................. l8 0 O I o 0 Mar 20l3 Sep 20|3 Mar 20|4 Sep 20|4 Mar 20|5 Month/year Figure l Exports to China Investment (billions of dollars per quarter) 89 .......................................... Investment falls ................. by $33 billion . . . . per quarter 87 ........................................ 88 .... 86 ................................... 85 0 O o o o Mar20l3 Sep20|3 Mar20|4 Sep 20|4 Mar20|5 Month/year Figure 2 Private Investment Aggregate planned expenditure (billions of dollars per quarter) 440 Equilibrium with 450 line no fall in exports and investment AEO 420 ............................................ .A AEI Fall in exports : and investment 398 ........... E Equilibriumwith 380 2 fall in exports E and investment TAH;_+_ 0 380 398 420 440 Real GDP (billions of dollars per quarter) Figure 3 Expenditure Equilibrium
