The economy is in equilibrium,TP = TE,and Real GDP is $500 billion.The MPC is 0.95,the multiplier is operative,and idle resources exist at each expenditure round.Autonomous investment spending rises by $4 billion.As a result,the TE curve shifts __________,inventory levels unexpectedly __________,business firms __________ the quantity of goods and services they produce,and Real GDP __________ by __________.

Question

Quizplus · Accepted Answer

Given the multiplier effect and an MPC of 0.95, an increase in autonomous investment spending leads to a larger increase in total spending and Real GDP. The multiplier formula is 1/(1-MPC), which in this case is 1/(1-0.95) = 20. A $4 billion increase in investment multiplied by the multiplier (20) results in an $80 billion increase in Real GDP. This causes the TE curve to shift upward, inventory levels to fall (as demand outpaces supply), and firms to increase production to meet the higher demand.

The Economy Is in Equilibrium,TP = TE,and Real GDP Is