Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditures increase by $10 billion, what will be the change in real GDP?
A) $50 billion
B) $2 billion
C) $10 billion
D) $8 billion

Question

Quizplus · Accepted Answer

The change in real GDP is calculated using the spending multiplier, which is 1/(1-MPC). With a slope of the AE curve (MPC) of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an increase in government expenditures by $10 billion will increase real GDP by 5 * $10 billion = $50 billion.

Suppose That the Slope of the AE Curve Is 0