Essays on Introductory Macroeconomics Assignment

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The paper "Introductory Macroeconomics" is a great example of an assignment on macro and microeconomics. The multiplier refers to the ratio of a change in national income to the initial change in autonomous expenditure that brought it about. It is therefore a measure of the effect on total national income of a unit change in a component of aggregate demand such as investment, government expenditure, or export (Rittenberg & Tregarthen 2008). It can be expressed as follows: Multiplier = Total change in national income The initial change in national income The term national income multiplier is a general term that covers the multiplier effects arising from any changes in the components of aggregate demand.

For example, it is possible to have the following multiplier: Government expenditure multiplier = Eventual change in national income The initial change in government spending The size of the multiplier is found by: - 1 1-marginal propensity to consume Or 1 Marginal propensity to save Marginal propensity to consume (MPC) + marginal propensity to save (MPS) =1, therefore, MPS=1-MPC (a)In our case when the MPC is 0.6 the value of the multiplier can be obtained by: - 1/ (1-0.6) =2.5 This implies that out of any addition to government income 60% is spent and 40% is saved.

If the government increases spending by $20 billion dollars, $ 12 billion would be spent on consumption while $8 billion would be saved. (b) The new equilibrium value of real GDP corresponding to the $20 billion dollar increase in government spending will be $850 billion. This is obtained by the consumption amount of $20, which will increase GDP by 2.5 times, this will give us an increase of 20*2.5=50. Therefore, the new equilibrium GDP will be $800+$50=$850. (c) If the MPC is 0.8 then the value of the multiplier can be obtained by: - 1/ (1-0.8) =5 This implies that out of any addition to government income, 80% is consumed and 20% is saved.

If the government spending is increased by $20 billion dollars, $16 billion dollars would be spent on consumption, and $4 billion dollars would be saved. (d) The new equilibrium value of real GDP corresponding to the $20 billion dollar increase in government spending will be $900 billion dollars. The investment amount of 20, will increase GDP by 5 times, this will give us an increase of 20 X 5 = 100.

Therefore, the new equilibrium GDP will be $800 + $100 = $900.  

References

Adelman, M. A., 1995. The Genie Out of the Bottle: World oil since 1970. Cambridge: MIT Press.

Economic Intelligence Unit (Great Britain), 2008. Country Report: Australia, 52 (54), p. 35.

Institute of petroleum (Great Britain), 2010. Petroleum review, 54 (647), p. 25.

National Institute of Economic and Social Research, 2010. National Institute economic review, 65 (37), p. 17.

Petroleum Pub. Co., 2007. Oil and Gas Journal, 57 (18), p.16.

Potts, D., 2011. Prepare for More Pain at the Pump, The Sydney morning Herald, [Online] Available at: http://www.smh.com.au/money/prepare-for-more-pain-at-the-pump-20110509-1eewa.html#ixzz1LpyU3cS3%3Cbr%20/%3E [Accessed 21 September 2011].

Rittenberg, L., Tregarthen, T., 2008. Principles of Macroeconomics. New York: Flat World knowledge, L.L.C.

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