In the simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption, suppose when autonomous aggregate expenditures rise by $500 billion, equilibrium real GDP increases by $2,500 billion.Which of the following statements is true?

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as the change in GDP divided by the change in autonomous spending, which is $2,500 billion / $500 billion = 5. The multiplier is also equal to 1/(1-MPC) or 1/MPS. Therefore, MPS = 1/5 = 0.2.

In the Simple Aggregate Expenditure Model Where All Components of Aggregate