Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditure increases by $10 billion, what will be the value of the change in real GDP?

Question

Quizplus · Accepted Answer

The slope of the AE curve (0.80) represents the marginal propensity to consume (MPC). The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.80) = 5. Therefore, a $10 billion increase in government expenditure would lead to a $50 billion increase in real GDP, as the multiplier effect amplifies the initial increase in spending.

Suppose That the Slope of the AE Curve Is 0