Suppose that the slope of the AE curve is 0.80. Then an increase of investment of $10 billion leads to an increase in equilibrium real GDP equal to

Question

Quizplus · Accepted Answer

The expenditure multiplier can be calculated as 1/(1-slope of AE curve). In this case, the expenditure multiplier would be 1/(1-0.80) = 5. An increase in investment of $10 billion would therefore lead to an increase in equilibrium real GDP of 5*$10 billion = $50 billion.

Suppose That the Slope of the AE Curve Is 0