All figures in the table below are in billions. Refer to the above data. If exports increased by $15 billion at each level of GDP, all other factors constant, then the equilibrium level of GDP would be:
A) $550 billion
B) $600 billion
C) $650 billion
D) $700 billion

Question

All figures in the table below are in billions.  Refer to the above data. If exports increased by $15 billion at each level of GDP, all other factors constant, then the equilibrium level of GDP would be:
A) $550 billion 
B) $600 billion 
C) $650 billion 
D) $700 billion

Quizplus · Accepted Answer

To determine the effect of an increase in exports, we need to look at the multiplier effect on GDP. From the table, we see that when GDP is $500 billion, the marginal propensity to consume (MPC) is 0.8. Therefore, the multiplier is 1/(1 - 0.8) = 5. When exports increase by $15 billion, this will increase the aggregate demand by $15 billion, which will increase GDP by 5 x $15 billion = $75 billion. Therefore, the new equilibrium level of GDP will be $550 billion + $75 billion = $625 billion. Repeating this process for each level of GDP in the table, we arrive at an equilibrium level of GDP of $650 billion.

All Figures in the Table Below Are in Billions