Table 13-3
All figures in billions of base-year dollars

-Refer to Table 13-3. Holding everything else constant, if government purchases increase by $100 billion, equilibrium real GDP will increase by
A) $100 billion.
B) $200 billion.
C) $250 billion.
D) $300 billion.

Question

Table 13-3
All figures in billions of base-year dollars
 
-Refer to Table 13-3. Holding everything else constant, if government purchases increase by $100 billion, equilibrium real GDP will increase by
A) $100 billion. 
B) $200 billion. 
C) $250 billion. 
D) $300 billion.

Quizplus · Accepted Answer

According to the Keynesian cross model, a $100 billion increase in government purchases will shift the aggregate expenditure function upward by $100 billion, which will in turn increase equilibrium real GDP by a multiple of the initial increase in government purchases, known as the multiplier. The multiplier in this case is calculated as 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, the equilibrium real GDP will increase by 5 times the initial increase in government purchases, which is $100 billion x 5 = $500 billion.

Table 13-3 All Figures in Billions of Base-Year Dollars