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    Aggregate expenditures


    This problem was changed from calculating aggregate demand to calculating the changes in aggregate expenditures. I thought with aggregate expenditures, knowing the MPC is useless information unless we are going to calculate the new, equilibrium GDP. I am stumped and would appreciate any insight.

    -Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate expenditures curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate expenditures? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal.

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    Solution Preview

    MPC = 0.8
    Change in Expenditure = Initial Expenditure x (1/1-MPC)
    => 25 = Initial Expenditure x (1/1-0.8)
    => Initial Expenditure = 25x0.2 = $5 billion

    Thus with government spending the government has to spend $5 billion in order to shift the aggregate demand curve by $25 billion.

    Tax Cut Scenario:
    The net impact remains the same. That is the government has to ...

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