Refer to the diagram for a private closed economy. In this economy, aggregate expenditures
A) do not change as GDP increases.
B) increase by $2 for every $5 increase in GDP.
C) increase by $2 for every $4 increase in GDP.
D) increase by $2 for every $3 increase in GDP.

Question

Refer to the diagram for a private closed economy. In this economy, aggregate expenditures
A) do not change as GDP increases. 
B) increase by $2 for every $5 increase in GDP. 
C) increase by $2 for every $4 increase in GDP. 
D) increase by $2 for every $3 increase in GDP.

Quizplus · Accepted Answer

The diagram shows a 45-degree line, indicating that aggregate expenditures increase in proportion to GDP. The slope of the line is 1, meaning that a $1 increase in GDP is associated with a $1 increase in aggregate expenditures. The consumption function intersects the vertical axis at $2, indicating that even when there is no income, there is still $2 worth of consumption. Therefore, aggregate expenditures increase by $2 for every $3 increase in GDP.

Refer to the Diagram for a Private Closed Economy