The table shows the consumption schedule for a hypothetical economy. All figures are in billions of dollars. Refer to the above table. If planned investments were fixed at $16, taxes were zero, government purchases of goods and services were zero, and net exports were zero, then equilibrium real GDP would be $630 initially. If government purchases were then raised from $0 to $4, other things constant, then the equilibrium real GDP would become:
A) $660
B) $630
C) $640
D) $650

Question

The table shows the consumption schedule for a hypothetical economy. All figures are in billions of dollars.  Refer to the above table. If planned investments were fixed at $16, taxes were zero, government purchases of goods and services were zero, and net exports were zero, then equilibrium real GDP would be $630 initially. If government purchases were then raised from $0 to $4, other things constant, then the equilibrium real GDP would become:
A) $660 
B) $630 
C) $640 
D) $650

Quizplus · Accepted Answer

Initially, with planned investments at $16, taxes and net exports at zero, and government purchases at zero, equilibrium real GDP is $630. If government purchases increase from $0 to $4, this will increase aggregate demand (AD) by $4 billion ($1 billion of government purchases will increase AD by $1 billion). This increase in AD will shift the consumption schedule upward and lead to a new equilibrium. Looking at the table, we see that at an output level of $650 billion, consumption is now $540 billion. Since AE = C + I + G + NX, we have:
AE = $540 billion (C) + $16 billion (I) + $20 billion (G) + $0 (NX) = $576 billion
At this output level, AD = AE, so the economy would be in equilibrium with real GDP of $650 billion. Therefore, the correct answer is D.

The Table Shows the Consumption Schedule for a Hypothetical Economy