During 2010, exports increase from $1.0 trillion to $1.5 trillion.If the slope of the aggregate planned expenditure (AE) curve is 0.75, real GDP increases by
A) $1.0 trillion.
B) $2.0 trillion.
C) $4.0 trillion.
D) $6.0 trillion.
E) $8.0 trillion.

Question

Quizplus · Accepted Answer

The increase in exports is an increase in net exports (NX), which is a component of AE along with consumption (C), investment (I), and government spending (G):
AE = C + I + G + NX
With a slope of 0.75, the multiplier for changes in AE is 1/(1-0.75) = 4. 
Therefore, the increase in exports of $0.5 trillion will result in an increase in AE of $0.5 trillion x 4 = $2.0 trillion.
Assuming constant prices (i.e. no inflation), the increase in AE will lead to an increase in real GDP by the same amount of $2.0 trillion.

During 2010, Exports Increase from $1