The following question are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion.

-If in the preceding question the multiplier is 3,the new level of GDP will be ________ billion.
A) $545
B) $515
C) $485
D) $470
E) $455

Question

The following question are based on the following diagram showing the equilibrium level of GDP. Exports are currently $60 billion and imports are $40 billion.
 
-If in the preceding question the multiplier is 3,the new level of GDP will be ________ billion.
A) $545 
B) $515 
C) $485 
D) $470 
E) $455

Quizplus · Accepted Answer

The equilibrium level of GDP is shown by the intersection of the aggregate expenditure line (AE) and the 45° line. In this case, the equilibrium level of GDP is $500 billion.

If the multiplier is 3, then the new level of GDP can be calculated as:
ΔGDP = multiplier * Δspending
Δspending = Δexports - Δimports = $20 billion

ΔGDP = 3 * $20 billion = $60 billion

The new level of GDP will be the original equilibrium level of GDP ($500 billion) plus the increase in spending of $60 billion, which is:
New GDP = $500 billion + $60 billion = $560 billion

Therefore, the correct answer is C ($485 billion is the original equilibrium level of GDP, so adding $60 billion with a multiplier of 3 will give a new GDP of $560 billion).

The Following Question Are Based on the Following Diagram Showing