Figure 10.2 -Refer to Figure 10.2.f in this economy the MPC = 0.6,Y₂ = $50 billion,and AE₂ is $5 billion below AE₁,potential GDP is A) $53 billion. B) $55 billion. C) $58.3 billion. D) $62.5 billion.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/0.4 = 2.5. The decrease in AE is $5 billion, so the decrease in GDP is 2.5 * $5 billion = $12.5 billion. Therefore, potential GDP is Y₂ + $12.5 billion = $50 billion + $12.5 billion = $62.5 billion.

Figure 10.2 -Refer to Figure 10.2.f in This Economy the MPC =