Exhibit 11-2

-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate expenditure line.How would a $100 increase in autonomous net taxes affect real GDP?
A) It would decrease real GDP by $200.
B) It would decrease real GDP by $100.
C) It would increase real GDP by $200.
D) It would increase real GDP by $100.

Question

Exhibit 11-2
 
-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate expenditure line.How would a $100 increase in autonomous net taxes affect real GDP?  
A) It would decrease real GDP by $200. 
B) It would decrease real GDP by $100. 
C) It would increase real GDP by $200. 
D) It would increase real GDP by $100.

Quizplus · Accepted Answer

A $100 increase in autonomous net taxes would decrease aggregate expenditure by $100, shifting the AE line downward. This would result in a decrease in real GDP by an amount equal to the marginal propensity to consume times the change in autonomous net taxes, which in this case is $100 times MPC of 0.5, or $50. Thus, real GDP would decrease by $100.

Exhibit 11-2 -Refer to the Graph in the Exhibit.Consider an Economy Characterized