Figure 10.2

-Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be

Question

Figure 10.2
Figure 10.2 -Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be A) $8 billion. B) $20 billion. C) $80 billion. D) $100 billion.

Figure 10.2 -Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be A) $8 billion. B) $20 billion. C) $80 billion. D) $100 billion.

-Refer to Figure 10.2.Assume the economy is initially at equilibrium at potential GDP of $500 billion.If the MPC = 0.80 ,and real GDP falls to Y₂ = $400 billion,the vertical distance between AE₁ and AE₂ must be

Quizplus · Accepted Answer

The vertical distance between AE₁ and AE₂ represents the change in aggregate expenditures (AE) due to the change in real GDP. According to the consumption function equation, the change in consumption (C) is equal to the MPC times the change in income (Y). Therefore, the change in AE is equal to the change in consumption (0.8 × (500-400) = $80 billion) plus any other changes in investment, government spending, and net exports. Since we are not given any information about those components, we can assume they remain constant, resulting in a vertical distance of $80 billion on the AE curve. However, since the question asks for the absolute value of the vertical distance, the answer is $20 billion (not $80 billion as in choice C).

Figure 10.2 -Refer to Figure 10.2.Assume the Economy Is Initially at Equilibrium