The following diagram shows an economy that initially has an aggregate expenditure function AK.

1. What is the initial equilibrium real GDP?

2. Suppose there is an increase in the marginal propensity to import. What is the new aggregate expenditure function?

3. What is the new equilibrium real GDP and income?

4.Suppose, instead, the marginal propensity to consume has increased.

5.What is the new aggregate expenditure function?

6.What is the new equilibrium real GDP and income?

7.The distinction between autonomous and induced expenditure is important for the determination of equilibrium real GDP. Assume that the marginal propensity spend on domestic output is 0.70 and autonomous aggregate expenditure is zero.

8. What is the equation for the aggregate expenditure function under these assumptions? 9. Draw the aggregate expenditure function in an income-expenditure 45 line diagram. 10. What is the equilibrium level of real GDP illustrated by your diagram?

11.Explain why this is the equilibrium level of real GDP.

12.Suppose the slope of the AE function is 0.6. Starting from equilibrium, suppose planned investment increases by 10.

13. By how much and in what direction does equilibrium income change?

14. How much of that change in equilibrium income is the result of the change in induced expenditure?

15.How would your answers to

16. differ if the slope of the AE function was 0.8?

17.Suppose autonomous expenditure is 100 and there is no induced expenditure in the economy.

18.Write the aggregate expenditure function for this economy.

19. Draw the aggregate expenditure function and the 45 line in a diagram.

20. What is the equilibrium level of real output and income?

21. By how much would equilibrium real output change if autonomous expenditure increased to 125? Show the change in expenditure and equilibrium in your diagram for part (b).

22.What is the size of the multiplier? Explain your answer.r