Use the figure below to answer the following questions.

Figure 27.3.1
The economy shown in the graph does not engage in international trade and has no government. Planned aggregate expenditure equals the sum of consumption expenditure (C)and investment (I).
-Refer to Figure 27.3.1. If investment increases by $25 billion, then real GDP increases by
A)$25 billion.
B)$125 billion.
C)$50 billion.
D)$100 billion.
E)$75 billion.

Question

Use the figure below to answer the following questions.
  
Figure 27.3.1
The economy shown in the graph does not engage in international trade and has no government. Planned aggregate expenditure equals the sum of consumption expenditure (C)and investment (I).
-Refer to Figure 27.3.1. If investment increases by $25 billion, then real GDP increases by
A)$25 billion. 
B)$125 billion. 
C)$50 billion. 
D)$100 billion. 
E)$75 billion.

Quizplus · Accepted Answer

According to the graph, investment is the only component that increases aggregate expenditure and thus increases GDP. The slope of the aggregate expenditure curve is equal to the multiplier (MPC/1-MPC). In this case, the MPC is 0.8, so the multiplier is 1/0.2 = 5. Therefore, a $25 billion increase in investment will lead to an increase in GDP of 5 x $25 billion = $125 billion.

Use the Figure Below to Answer the Following Questions