Exhibit 10-5
-In Exhibit 10-5, assume the economy is in equilibrium with real GDP of $5 trillion dollars. If aggregate expenditure (AE) increases by $1 trillion, we would expect the economy's equilibrium real GDP to

Question

Exhibit 10-5 
-In Exhibit 10-5, assume the economy is in equilibrium with real GDP of $5 trillion dollars. If aggregate expenditure (AE) increases by $1 trillion, we would expect the economy's equilibrium real GDP to

Quizplus · Accepted Answer

This is because of the multiplier effect. The increase in AE will lead to an increase in spending, which in turn leads to an increase in incomes and consumption. This cycle continues until the increase in real GDP is greater than the initial increase in AE. The size of the multiplier depends on the economy's marginal propensity to consume (MPC).

Exhibit 10-5 -In Exhibit 10-5, Assume the Economy Is in Equilibrium with in Equilibrium