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Assume that the full-employment level of output is $1,000 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $1,100 and, at the price level of 100, current aggregate demand is $1,200. If the government moves the economy back to the full-employment level of output by reducing government purchases by $50, then the expenditures multiplier equals

Respuesta :

Answer: Expenditures multiplier = 4

Explanation:

Given that,

Potential output = $1000

Price level associated with full-employment output = $100

Current level of output = $1,100 at price level = $100

Current aggregate demand = $1,200

Required shift in the aggregate demand = $200

If government restores economy back to its initial position of full employment by reducing government purchases by $50, then

Expenditures multiplier = \frac{Required\ shift\ in\ aggregate\ demand}{Change\ in\ government\ purchases}

                                        = [tex]\frac{200}{50}[/tex]

                                        = 4