2019 Nov (Multiplier GDP) Paper 1 HL

 2019 Nov (Multiplier GDP) Paper 1 HL

(4) (a) Explain the effect an increase in investment might have on RGDP using the Keynesian multiplier.

 

Definitions

RGDP – Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced in an economy in a given year (expressed in base-year prices) and are often referred to as “constant-price”, “inflation-corrected”, or “constant-dollar” GDP.

Investment – addition of capital stock to the country

 

Keynesian Multiplier - below

(AD to AD1 is the initial increase in investment but then the multiplier effect pushes AD to AD3. Therefore the RGDP (Real Output) also increases)

An initial increase in investment, a component of AD, leads to multiple successive increases in AD and RGDP.

 

Explanation – When there is an injection into the system (government expenditure, investment) incomes increase by the amount of the injection at first. However, the increase does not stop there. Assume MPC = 0.5, such that 50% of the additional household income is spent on consumption. With an initial injection of $100, total income increases by $100. The $100 is then paid out to households as factor income (wages) by firms. Household income increase by $100. As MPC is 0.5, households spend 50% of their income, which is $50 spent as consumption expenditure to firms then firms gain $50 and again pay $50 as factor income to household (workers). From the $50 income households now spend $25 on consumption.

 

This in essence is the Keynesian Multiplier formula 1/(1-MPC) or 1/MPS, if the MPC = 0.5 then the MPS = .5 therefore 1/.5 = 2 and the 2 is the Multiplier.

 

An initial increase in investment of $100 x 2 = $200 is the total income (RGDP) generated by the initial increase in income (investment) of $100.

2019 Nov (Multiplier) Paper 3 HL

 2019 Nov (Multiplier) Paper 3 HL

If the MPC is .75 then the MPS = .25 the Multiplier Formula = 1/MPS

 

1/ .25 = 4, The Multiplier is 4

 

Investment increased by 11 million x 4 = 44m increase in RGDP

Government Spending decreased by 8 million x 4 = 32m decrease in RGDP

 

Therefore RGDP actually increased by 44 – 32 = 12m gamma

2013 Nov (Multiplier) Paper 3 HL

2013 Nov (Multiplier) Paper 3 HL

(c) (i) Using the data in table 2, calculate the value of the Keynesian multiplier in South Korea.

1/ (.3 + .3 + .2) = 1.25

(ii) Using the multiplier calculated in (c) (i), calculate the change in South Kore’s real GDP brought about the rise in its exports from 2009 to 2010.

 

Change in exports = $448b - $412b = $36b

 

$36b x 1.25 = $45b

 

(iii) On the axes below, draw an appropriate AD/AS diagram and use it to explain the impact on South Korean RGDP of the change in South Korean exports from 2009 to 2010.

As exports increase aggregate Demand increases thus leading to an increase in real GDP.

2014 May (Multiplier) Paper 3 HL

2014 May (Multiplier) Paper 3 HL

(e) In country Z, for each additional $1 of income earned, 4 cents ($0.04) is saved, 15 cents ($0.15) is taken as tax and 6 cents ($0.06) is spent on imported goods and services.

Calculate the value of the multiplier in country Z

 

1/ (.04 + .15 + .06)  = 4 Value of the multiplier in Country Z.

(f) (i) The government of Country Z intends to increase government spending in order to increase GDP by $950 million. Using your answer to (e), calculate the increases in government spending needed to bring about the desired change in GDP.

 

$950m /4 = 237,500,000

 

(ii) Sketch an AD/AS diagram to show the impact of the multiplier.

AD is where we start, then gov’t-spending gets the GDP to AD1 then with the multiplier effect AD shifts to AD2.

 

Vertical axis (PL, APL, CPI, GPL)

Horizontal Axis (GDP, Real Output, Real Income, RGDP or Y)

 

(g) Explain the multiplier process, which will cause the final increase in GDP to be different from the initial increase in government spending.

 

Spending by one person represents income to another. Thus an increase in government spending leads to a series of additional increases to income. Therefore the eventual increase in GDP will be greater than the initial increase in government spending.

2018 (Multiplier) Paper 3 HL

2018 (Multiplier) Paper 3 HL

(g)

(i) Calculate the maximum possible increase in GDP that could result from the rise in investment.

 

Multiplier = 1/1-MPC

 

Marginal Propensity to Consume = the proportion of additional income used for consumption

 

MPC = .8

So 1/1-.8 = 1/. 2 = 5 is the Multiplier

 

Investment increases by 2b x 5 = 10b increase in GDP

(ii) Country Delta is an open economy with a government sector. Investment rises by $2 billion in both Delta and Beta. Explain how the size of the multiplier and the resulting effect on GDP might be different in the two countries.

 

Beta is a closed economy with no government sector

 

Delta is an open economy with a government sector and has more leakages

as (imports & income taxes) occur in economies with open sectors with a government

 

An increase in investment will increase RGDP by smaller amounts as a greater proportion is withdrawn before additional spending takes place.

 

The effect on RGDP in Delta will be smaller than in Beta.

2019 May (Multiplier) Paper 3 HL

2019 May (Multiplier) Paper 3 HL

(I)  Using this information, calculate the value of the Keynesian multiplier.

 

Citizens spend 10% on imported goods = MPM = 10% = .1

Citizens pay a tax rate of 20% = MPT = 20% = .2

Citizens have a marginal propensity to save of 10% = MPS = 10% = .1

1/. 4 = 2.5 = Multiplier

 

(j) Using your answer to part (I), calculate the increase in government spending necessary to increase nominal GDP by $100 billion.

 

NGDP/Multiplier = Amount of Gs.

100b/2.5 = 40b of Government Spending

 

Gs x Multiplier = NGDP increase

40b x 2.5 = 100b in NGDP