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.