In a simple economy in which prices are constant and with no income taxes or imports, the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion,
A)autonomous expenditure needs to be increased by $100 billion.
B)investment needs to be increased by $500 billion.
C)consumption expenditure needs to be increased by $500 billion.
D)saving needs to be reduced by $500 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. With a slope of 0.8, the MPC is 0.8, so the multiplier is 5. To increase GDP by $500 billion, autonomous expenditure must increase by $100 billion (500/5).

In a Simple Economy in Which Prices Are Constant and with No