The slope of the AE curve is 0.9. Investment decreases by $100 million and the price level is constant. Real GDP
A) decreases by $10 million.
B) increases by $1 billion.
C) increases by $90 million.
D) decreases by $1 billion.

Question

Quizplus · Accepted Answer

The AE curve's slope of 0.9 indicates the marginal propensity to consume. A $100 million decrease in investment leads to a multiplied effect on GDP. The multiplier is 1/(1-0.9) = 10, so GDP decreases by 10 * $100 million = $1 billion.

The Slope of the AE Curve Is 0