During 2018, exports increase from $1.0 trillion to $1.5 trillion. If the slope of the aggregate planned expenditure (AE) curve is 0.75, real GDP increases by
A) $1.0 trillion.
B) $6.0 trillion.
C) $4.0 trillion.
D) $8.0 trillion.
E) $2.0 trillion.

Question

Quizplus · Accepted Answer

The increase in exports of $0.5 trillion acts as an autonomous increase in aggregate planned expenditure. Given the slope of the AE curve is 0.75, the multiplier is 1/(1 - slope) = 1/(1 - 0.75) = 4. Therefore, the increase in real GDP is $0.5 trillion * 4 = $2.0 trillion.

During 2018, Exports Increase from $1