<ol>
<li>In shifting the$\ AD_1 \rightarrow AD$ curves to achieve long run equilibrium, Real GDP will have to increase by 200 billion. Refer to the diagram below, (in purple).</li>
</ol>

<p><a href="https://i.sstatic.net/g5c4y.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/g5c4y.jpg" alt="enter image description here"></a></p>

<ol start="2">
<li>$\ MPC = 0.75 \rightarrow MPS = 0.25$</li>
</ol>

<p>In this 3 sector closed-economy model, the multiplier can be calculated using : </p>

<p>$$\ K = \frac{1}{MPS+MPT} $$</p>

<p>Assuming MPT (Marginal Propensity to Tax) = 0, then $\ K = \frac{1}{MPS} = \frac{1}{0.25} = 4 $</p>

<p>$\ \Delta Y=K\Delta (AE) $, considering only government expenditure, then
$\ \Delta Y=K\Delta G $</p>

<p>Substituting the values, $\ 200B = 4G \rightarrow G = 50 $</p>

<ol start="3">
<li>If currently, the $\ AD $ component is $\ AD = 400B $ at $\ MPC = 0.75 $, then we can calculate the original income, $\ Y = (0.75)^{-1} \times AD = (0.75)^{-1} \times 400Bil = 533.33Bil $</li>
</ol>

<p>Now using this value of $\ Y $, we can calculate the new $\ AD $ component at $\ MPC = 0.6 $, which is $\ AD_{new} = 0.6 \times 533.33Bil = 320Bil $</p>

<p>Hence, using the same approach as in <strong>Part 1</strong>, the lime-green line is $\ AD_{new} $, the purple section represents $\Delta AD, $ which, as in <strong>Part 2</strong>, with a new multiplier of $\ K $ calculated using the new $\ MPS = 0.4 $, and substituting those values into $\ \Delta Y=K\Delta G $ will result in your new government expenditure.</p>

<p><a href="https://i.sstatic.net/V6jfJ.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/V6jfJ.jpg" alt="enter image description here"></a></p>

CC BY-SA 3.0
2017-01-25T09:44:11.870Z
2017-01-25T10:11:35.253Z
2017-01-25T10:11:35.253Z
Joshua Chin
<ol>
<li>200 billion</li>
</ol>

<p>Look at P = 80. If you shift the aggregate demand curve over by 100, the AD curve will intersect the LRAS at P = 80 instead of P = 100. You need to shift it by 200. </p>

<ol start="2">
<li>50 </li>
</ol>

<p>Since the answer to 1 has changed so has 2.</p>

<ol start="3">
<li>80 billion</li>
</ol>

<p>Same as 2. </p>

CC BY-SA 3.0
2016-07-14T15:54:09.933Z
2016-07-14T15:54:09.933Z
Kontorus
<p>I am having a hard time with the following economic questions (See attached). Here is my approach:</p>

<p>Note about the curves: The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to increase government purchases as fiscal policy to reduce the burden of this recession. </p>

<ol>
<li><p><em>How much does aggregate demand need to increase to reach long-run equilibrium?</em> </p>

<p>A: 100 billion
Because that's the AD1-AS equilibrium to AD1-LRAS line</p></li>
<li><p>MPC =.75 (and thus MPS = .25)</p>

<p><em>How much do government purchases need to increase to shift aggregate demand by the amount you found in part 1)?</em></p>

<p>My logic:
The expenditure multiplier = 1/MPS = 1/(.25) =4 </p>

<p>Delta Y from 1) is 100 billion</p>

<p>Therefore, 4X= 100 (x = government purchases) leading to x = 25</p></li>
<li><p><em>Suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be increased by i) ___________ and government purchases must be increased by ii) ________________</em></p>

<p>Delta Y is the same as 1), so it's 100 billion for i)</p>

<p>MPS changes to .6, so the multiplier is 1/.4 = 2.5, 100/2.5 = 40 billion in government purchases to restore long-run equilibrium. </p></li>
</ol>

<h3>So then, how are my answers wrong according to the program?</h3>

<p><a href="https://i.sstatic.net/f3Wz8.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/f3Wz8.png" alt="enter image description here"></a></p>

CC BY-SA 3.0
2016-07-12T06:17:13.317Z
Can you share the link to this program. I think your answers are correct. There may be some technical problem with the website.
Sub-Optimal
CC BY-SA 3.0
2016-07-12T19:20:38.100Z
@AbhinavArya From the image, I get http://ezto.mheducation.com/hm.tpx?_=0.8615001729195662_1468297017185 but that leads nowhere. http://www.mheducation.com does however. I'm not sure external have access to it though.
clem steredenn
CC BY-SA 3.0
2016-07-12T22:39:20.280Z
The URL did not lead me where I wanted to. Anyways, your answer is correct. It must be some technical problem. I failed to find anything wrong in your solution.
Sub-Optimal
<macroeconomics><general-equilibrium><fiscal-policy><aggregate-production>
Macroeconomics: Aggregate Demand, Equilibrium Dynamics and Expenditure Multipliers
Dana_Brooke
# Macroeconomics: Aggregate Demand, Equilibrium Dynamics and Expenditure Multipliers

(Asked by: username_0 on 2016-07-12)

I am having a hard time with the following economic questions (See attached). Here is my approach:

Note about the curves: The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to increase government purchases as fiscal policy to reduce the burden of this recession.

1. *How much does aggregate demand need to increase to reach long-run equilibrium?*

   A: 100 billion
   Because that's the AD1-AS equilibrium to AD1-LRAS line
2. MPC =.75 (and thus MPS = .25)

   *How much do government purchases need to increase to shift aggregate demand by the amount you found in part 1)?*

   My logic:
   The expenditure multiplier = 1/MPS = 1/(.25) =4

   Delta Y from 1) is 100 billion

   Therefore, 4X= 100 (x = government purchases) leading to x = 25
3. *Suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be increased by i) \_\_\_\_\_\_\_\_\_\_\_ and government purchases must be increased by ii) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_*

   Delta Y is the same as 1), so it's 100 billion for i)

   MPS changes to .6, so the multiplier is 1/.4 = 2.5, 100/2.5 = 40 billion in government purchases to restore long-run equilibrium.

### So then, how are my answers wrong according to the program?

[![enter image description here](https://i.sstatic.net/f3Wz8.png)](https://i.sstatic.net/f3Wz8.png)

**Tags:** macroeconomics, general-equilibrium, fiscal-policy, aggregate-production

> **Comments:**
> **username_1**: Can you share the link to this program. I think your answers are correct. There may be some technical problem with the website.  
> **username_2**: @AbhinavArya From the image, I get http://ezto.mheducation.com/hm.tpx?_=0.8615001729195662_1468297017185 but that leads nowhere. http://www.mheducation.com does however. I'm not sure external have access to it though.  
> **username_1**: The URL did not lead me where I wanted to. Anyways, your answer is correct. It must be some technical problem. I failed to find anything wrong in your solution.  

---

## 2 answers

### Answer by username_3 on 2017-01-25. Score: 1

1. In shifting the$\ AD\_1 \rightarrow AD$ curves to achieve long run equilibrium, Real GDP will have to increase by 200 billion. Refer to the diagram below, (in purple).

[![enter image description here](https://i.sstatic.net/g5c4y.jpg)](https://i.sstatic.net/g5c4y.jpg)

2. $\ MPC = 0.75 \rightarrow MPS = 0.25$

In this 3 sector closed-economy model, the multiplier can be calculated using :

$$\ K = \frac{1}{MPS+MPT} $$

Assuming MPT (Marginal Propensity to Tax) = 0, then $\ K = \frac{1}{MPS} = \frac{1}{0.25} = 4 $

$\ \Delta Y=K\Delta (AE) $, considering only government expenditure, then
$\ \Delta Y=K\Delta G $

Substituting the values, $\ 200B = 4G \rightarrow G = 50 $

3. If currently, the $\ AD $ component is $\ AD = 400B $ at $\ MPC = 0.75 $, then we can calculate the original income, $\ Y = (0.75)^{-1} \times AD = (0.75)^{-1} \times 400Bil = 533.33Bil $

Now using this value of $\ Y $, we can calculate the new $\ AD $ component at $\ MPC = 0.6 $, which is $\ AD\_{new} = 0.6 \times 533.33Bil = 320Bil $

Hence, using the same approach as in **Part 1**, the lime-green line is $\ AD\_{new} $, the purple section represents $\Delta AD, $ which, as in **Part 2**, with a new multiplier of $\ K $ calculated using the new $\ MPS = 0.4 $, and substituting those values into $\ \Delta Y=K\Delta G $ will result in your new government expenditure.

[![enter image description here](https://i.sstatic.net/V6jfJ.jpg)](https://i.sstatic.net/V6jfJ.jpg)


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### Answer by username_4 on 2016-07-14. Score: 0

1. 200 billion

Look at P = 80. If you shift the aggregate demand curve over by 100, the AD curve will intersect the LRAS at P = 80 instead of P = 100. You need to shift it by 200.

2. 50

Since the answer to 1 has changed so has 2.

3. 80 billion

Same as 2.


---

