Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. The marginal propensity to consume is 0.75. Suppose the equilibrium level of real GDP at the prevailing price is $600 billion below potential real GDP. All else constant, by how much should autonomous aggregate expenditures be increased to reach potential output?
A) $150 billion
B) $450 billion
C) $600 billion
D) $800 billion

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. To close a $600 billion gap, autonomous expenditures should increase by $600 billion / 4 = $150 billion.

Consider a Simple Aggregate Expenditure Model Where All Components of Aggregate