Use the following to answer questions .
Exhibit: Real GDP and the Multiplier

-(Exhibit: Real GDP and the Multiplier) Holding everything else constant, if net exports fall by $400 billion, equilibrium real GDP will decrease
A) $1,000 billion.
B) $800 billion.
C) $500 billion
D) $400 billion.

Question

Use the following to answer questions .
Exhibit: Real GDP and the Multiplier
 
-(Exhibit: Real GDP and the Multiplier) Holding everything else constant, if net exports fall by $400 billion, equilibrium real GDP will decrease
A) $1,000 billion. 
B) $800 billion. 
C) $500 billion 
D) $400 billion.

Quizplus · Accepted Answer

The multiplier effect amplifies the initial change in spending. If the marginal propensity to consume (MPC) is 0.6, the multiplier is 1/(1-MPC) = 2.5. Thus, a $400 billion decrease in net exports leads to a $1,000 billion decrease in equilibrium real GDP ($400 billion * 2.5).

Use the Following to Answer Questions