Suppose that the slope of the AE curve is 0.80. If prices remain constant and government expenditure increases by $10 billion, what will be the change in real GDP?
A) $2 billion
B) $8 billion
C) $50 billion
D) $10 billion

Question

Quizplus · Accepted Answer

The change in real GDP can be calculated using the spending multiplier, which is 1/(1-MPC). Here, MPC is 0.80, so the multiplier is 1/(1-0.80) = 5. Therefore, an increase in government expenditure by $10 billion will increase real GDP by 5 * $10 billion = $50 billion.

Suppose That the Slope of the AE Curve Is 0