Figure 23-4
-Refer to Figure 23-4.Potential GDP equals $500 billion.The economy is currently producing GDP1 which is equal to $450 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A)-$40 billion
B)-$10 billion
C)$10 billion
D)$40 billion

Question

Figure 23-4 
-Refer to Figure 23-4.Potential GDP equals $500 billion.The economy is currently producing GDP1 which is equal to $450 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A)-$40 billion 
B)-$10 billion 
C)$10 billion 
D)$40 billion

Quizplus · Accepted Answer

To calculate the required change in autonomous spending, we can use the equation:

ΔY = (1/1-MPC) x ΔAutonomous Spending

where ΔY is the change in GDP and MPC is the marginal propensity to consume.

Using the given values, we get:

50 billion = (1/0.2) x ΔAutonomous Spending 
ΔAutonomous Spending = 0.2 x 50 billion 
ΔAutonomous Spending = $10 billion

Therefore, option C is the correct answer. A decrease in autonomous spending by $10 billion will bring the economy to its potential GDP level of $500 billion.

Figure 23-4 -Refer to Figure 23-4.Potential GDP Equals $500 Billion.The Economy Is