Topics: Economics, Macroeconomics, Keynesian economics Pages: 3 (1033 words) Published: March 15, 2014

(a) Calculate autonomous expenditure, the multiplier and equilibrium GDP demanded. (30 Marks) a.) The Autonomous Expenditure is the sum of investment, government expenditure and exports, which does not vary with real GDP. (ref. 1) According to the table, the autonomous expenditure = C+I + G+ X= 10 +17+12= £84 (billion) (fig 2)

Multiplier= 1/ 1- slope of AE= 1/1-0.72= 3.57
The equilibrium GDP demanded is when the real GDP is equal to Autonomous expenditure. Therefore, from the calculation, the equilibrium GDP demanded= £300(billion) (b) Illustrate your answers with a Keynesian cross diagram, and explain the process by which the economy comes to equilibrium. (30 Marks) 1b.) The Keynesian cross diagram shows the two lines which represent the real GDP and the Aggregate planned Expenditure. There is usually a point of interception between the real GDP and the Aggregate planned Expenditure, which is the equilibrium expenditure. The equilibrium expenditure is a level of aggregate expenditure and real GDP at which everyone‘s spending are fulfilled. When the aggregate planned expenditure is not the same as actual aggregate expenditure, a process of convergence towards the equilibrium expenditure happens. (Ref 2) At first, we usually have our autonomous expenditure which is planned by the government. By calculating the aggregate expenditure, we have to sum up the consumer spending with the autonomous expenditure and then minus the import. From the graph, we plotted the point (AE is at Y-axis Real GDP is at X-axis) and it became a straight line and it has a positive slope in the graph. Meanwhile, the line of actual expenditure is formed where the aggregate planned expenditure is equal to the real GDP. It formed a 45 degree angle towards the axis. As I mentioned above, when, two lines will has a different slopes so they will meet up at a point, which is the equilibrium expenditure. However, with the different slopes of the actual expenditure the planned aggregate...
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