Consider a closed economy described by AE (aggregate expenditures)= 800, 000 + 0.75Y Assume that this economy is initially in equilibrium.But now the government implements a program to improve highways that will cost $1 million.This implies that equilibrium real GDP will:

Question

Quizplus · Accepted Answer

The increase in government spending on highways by $1 million will lead to an increase in aggregate expenditures by $0.75 million (since the MPC is 0.75). The increase in aggregate expenditures will lead to a larger increase in equilibrium real GDP, given by the multiplier effect. The multiplier is given by the formula 1/ (1-MPC), which in this case is 1/ (1-0.75) = 4. Therefore, the equilibrium real GDP will increase by 4 times the increase in aggregate expenditures, or $4 million.

Consider a Closed Economy Described by AE (Aggregate Expenditures)= 800