Learning Objective 19.

Solved
Using the Multiplier Problem
Formula 19-4
Chapter 19: Output and Expenditure in the Short Run

Planned
PLANNED GOVERNMENT Aggregate
REAL GDP CONSUMPTION INVESTMENT PURCHASES NET EXPORTS Expenditure
(Y) (C) (I) (G) (NX) (AE)
$8
,000 $6,900 $1,000 $1,000 –$500 8,400
9,000 7,700 1,000 1,000 –500 9,200
10,000 8,500 1,000 1,000 –500 10,000
11,000 9,300 1,000 1,000 –500 10,800
12,000 10,100 1,000 1,000 –500 11,600

1 © Pearson Education 2011

 a. What is the equilibrium level of real GDP? 10,000
when y = AE
Chapter 19: Output and Expenditure in the Short Run

8,500−7,700
b. What is the MPC? MBC = = 0.8
10,000−9,000
c. Suppose government purchases increase by US$200
billion. What will be the new equilibrium level of real
GDP? Use the multiplier formula to determine
multiplier= 1 /1 − MPC = 1/1 – 8 = 5

new equilibrium level = old equilibrium + (multiplier × Percentage of

increase(
= 10,000 + ( 5 ×200)
= 11,000