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Exhibit: Aggregate Expenditures and Real GDP 2
-(Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. If potential real GDP is $9,000 billion, by how much must planned investment change to reach potential real GDP?

Question

Use the following to answer questions .
Exhibit: Aggregate Expenditures and Real GDP 2

-(Exhibit: Aggregate Expenditures and Real GDP 2) Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_P = Planned Investment. Consider a simple economy where AE = C + I_P, I_P is autonomous and the consumption function is given by C = $1,000 billion + 0.75Y. If potential real GDP is $9,000 billion, by how much must planned investment change to reach potential real GDP?

Quizplus · Accepted Answer

At potential real GDP, Y = $9,000 billion. Therefore, AE = Y. Using the consumption function, we get AE = C + I_P = $1,000 billion + 0.75Y + I_P. Setting this equal to Y and solving for I_P, we get I_P = $250 billion. Therefore, to reach potential real GDP, I_P must increase by $250 billion.

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