Refer to the above graph for a private closed economy. If the consumption schedule shifts up by $50 B at all levels of income or output, then the equilibrium GDP will increase to:
A) $550 B
B) $300 B
C) $600 B
D) $150 B

Question

Refer to the above graph for a private closed economy. If the consumption schedule shifts up by $50 B at all levels of income or output, then the equilibrium GDP will increase to:
A) $550 B 
B) $300 B 
C) $600 B 
D) $150 B

Quizplus · Accepted Answer

In a private closed economy, equilibrium GDP occurs when planned aggregate expenditures (PAE) equal real GDP. Looking at the graph, we can see that the equilibrium GDP occurs at the intersection of the PAE line (consumption + planned investment) and the 45-degree line (where real GDP equals total expenditures).

If the consumption schedule shifts up by $50 B at all levels of income or output, this means that for every level of income, consumption increases by $50 B. This shifts the consumption line upward, increasing PAE at every level of income/output.

As a result, the new PAE line will intersect the 45-degree line at a higher level of output/GDP. Based on the graph, we can see that the new equilibrium GDP is $600 B, which is the point where the new PAE line intersects the 45-degree line. Therefore, the answer is C.

Refer to the Above Graph for a Private Closed Economy