Go to the BEA website www.bea.gov. On the left tab under Publications, go to the Interactive Data Tables. Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine all four components of GDP (C, I, G, and Xn). Which of these four components of AD declined the most during the 2007 and 2009 recession? Do you think an increase in government\'s spending (G) can boost the Aggregate Demand (AD) in a recession? Analyze why the economy may operate below full-employment GDP in the short run. How can the multiplier have a negative effect? What is the relationship between the multiplier and the marginal propensities? Explain. Solution Go to the BEA website www,bea.gov. On the left tab under Publications, go to the Interactive Data Tables. Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine all four components of GDP (C, I, G, and Xn). Which of these four components of AD declined the most during the 2007 and 2009 recession? Do you think an increase in government\'s spending (G) can boost the Aggregate Demand (AD) in a recession? Analyze why the economy may operate below full-employment GDP in the short run. How can the multiplier have a negative effect? What is the relationship between the multiplier and the marginal propensities? Explain. Answe r: Looking at table 1.1.6 and 1.1.7, we note that the decline in private investment expenditure was larger than decline any other component of aggregate demand. Private investment fell from $2,123.6 billion in fourth quarter of 2007 [starting period of recession] to $1397.2 billion in second quarter of 2009 [end of recession] i.e. there was almost 34.2% decline in the private investment during this recession period whereas other components such as private consumption expenditure declined by 3.37% [from 9312.6 to 8,998.5], government expenditure in fact increased by 3.69% [from 2455.3 to 2546]. An increase in government expenditure can certainly boost aggregate demand in the economy. Government expenditure is an important component of aggregate demand in the economy. An increase in government expenditure leads to increase in income of households which causes increase in consumption expenditure. Since expenditure of one person is income for the other, so the income will further increase and will lead to further increase in consumption expenditure and hence in aggregate demand. [Suppose two sector economies] Given this definition multiplier (M) is given by following formula: , where .

1. Go to the BEA website www.bea.gov. On the left tab under Publications, go to the Interactive
Data Tables. Select National Income and Product Accounts. From Table 1.1.6 and 1.1.7 examine
all four components of GDP (C, I, G, and Xn). Which of these four components of AD declined
the most during the 2007 and 2009 recession? Do you think an increase in government's
spending (G) can boost the Aggregate Demand (AD) in a recession? Analyze why the economy
may operate below full-employment GDP in the short run. How can the multiplier have a
negative effect? What is the relationship between the multiplier and the marginal propensities?
Explain.
Solution
Go to the BEA website www,bea.gov. On the left tab under Publications, go to the
Interactive Data Tables. Select National Income and Product Accounts. From Table 1.1.6
and 1.1.7 examine all four components of GDP (C, I, G, and Xn). Which of these four
components of AD declined the most during the 2007 and 2009 recession? Do you think an
increase in government's spending (G) can boost the Aggregate Demand (AD) in a
recession? Analyze why the economy may operate below full-employment GDP in the short
run. How can the multiplier have a negative effect? What is the relationship between the
multiplier and the marginal propensities? Explain.
Answe r:
Looking at table 1.1.6 and 1.1.7, we note that the decline in private investment expenditure was
larger than decline any other component of aggregate demand. Private investment fell from
$2,123.6 billion in fourth quarter of 2007 [starting period of recession] to $1397.2 billion in
second quarter of 2009 [end of recession] i.e. there was almost 34.2% decline in the private
investment during this recession period whereas other components such as private consumption
expenditure declined by 3.37% [from 9312.6 to 8,998.5], government expenditure in fact
increased by 3.69% [from 2455.3 to 2546].
An increase in government expenditure can certainly boost aggregate demand in the economy.
Government expenditure is an important component of aggregate demand in the economy. An
increase in government expenditure leads to increase in income of households which causes
increase in consumption expenditure. Since expenditure of one person is income for the other, so
the income will further increase and will lead to further increase in consumption expenditure and
hence in aggregate demand.

2. [Suppose two sector economies]
Given this definition multiplier (M) is given by following formula:
, where