The figure given below represents the macroeconomic equilibrium in the aggregate income and aggregate expenditure framework. Assume that MPI is equal to zero.

-If the spending multiplier equals 5 and equilibrium income is $2 billion below potential GDP, then _____ to reach the potential real GDP level.

Question

The figure given below represents the macroeconomic equilibrium in the aggregate income and aggregate expenditure framework. Assume that MPI is equal to zero.
 
-If the spending multiplier equals 5 and equilibrium income is $2 billion below potential GDP, then _____ to reach the potential real GDP level.

Quizplus · Accepted Answer

Since the spending multiplier equals 5, a $2 billion gap between equilibrium income and potential GDP requires an increase in total spending of $0.4 billion (2/5). This is because each additional dollar of spending will lead to a $5 increase in equilibrium income (5 times multiplier). Therefore, the correct answer is E.

The Figure Given Below Represents the Macroeconomic Equilibrium in the Aggregate