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 $90 million.
C) decreases by $1 billion.
D) increases by $1 billion.

Question

Quizplus · Accepted Answer

The slope of the AE (Aggregate Expenditure) curve is 0.9, which means the marginal propensity to consume (MPC) is 0.9. A decrease in investment by $100 million leads to an initial decrease in aggregate expenditure by the same amount. The total decrease in real GDP is calculated by the initial decrease divided by (1 - MPC), which is $100 million / (1 - 0.9) = $1 billion. Therefore, real GDP decreases by $1 billion.

The Slope of the AE Curve Is 0