Exhibit 12-1

-Given the information in Exhibit 12-1, if government purchases increased to $300, equilibrium real GDP demanded would increase by
A)$300
B)$500
C)$1,200
D)$1,500
E)$2,500

Question

Exhibit 12-1
 
-Given the information in Exhibit 12-1, if government purchases increased to $300, equilibrium real GDP demanded would increase by
A)$300 
B)$500 
C)$1,200 
D)$1,500 
E)$2,500

Quizplus · Accepted Answer

According to the exhibit, there is a marginal propensity to consume (MPC) of 0.6, which means that for every increase of $1 in government purchases, equilibrium real GDP demanded would increase by $1/ (1-0.6) = $2.5. Therefore, an increase in government purchases to $300 would result in an increase in equilibrium real GDP demanded of $300 x $2.5 = $750. However, since this question is asking for the increase in equilibrium real GDP demanded only, we need to subtract the initial real GDP demanded of $1,500 from the new equilibrium real GDP demanded of $2,250. The difference is $750, which corresponds to answer choice B.

Exhibit 12-1 -Given the Information in Exhibit 12-1, If Government Purchases Increased