Figure 13-5

-Refer to Figure 13-5.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

Figure 13-5

-Refer to Figure 13-5.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

To reach potential real GDP, we need AE = Y. From the given information, AE = C + I_P. Thus, Y = $1,000 billion + 0.75Y + I_P. Rearranging, I_P = Y - $1,000 billion - 0.75Y = 0.25Y - $1,000 billion. Substituting Y = $9,000 billion (potential real GDP), we get I_P = $2,000 billion. To reach potential real GDP, I_P needs to increase by $250 billion (i.e. $2,250 billion - $2,000 billion).

Figure 13-5 -Refer to Figure 13-5.Let Y = Real GDP, AE =