Figure 8.6 Alt text for Figure 8.6: In figure 8.6, a graph depicting potential GDP.
Long description for Figure 8.6: The x-axis is labelled, real GDP, Y (billions of 2007 dollars) , with values GDP1 and GDP2 marked.The y-axis is labelled, real aggregate expenditure, AE (billions of 2007 dollars) .Line AE1, begins a little less than half way along the x-axis and slopes up to the end of the x-axis.Line AE2, begins at a point half way along the x-axis and slopes up to the top right corner.Line AE2 is to the left of AE1 and is on a similar path as line AE1.Line Y = AE, originates at the vertex and slopes up to the top right corner.Line Y = AE meets line AE1 at point K, half way along both lines.Line Y = AE meets line AE2 at point N, plotted close to the right end of line AE2.Point J is plotted a little less than half way along line AE1, to the left of point K.Point L is plotted close to the right end of line AE1, to the right of point K.Point K is connected to its x-coordinate, GDP1, with a dotted line.A straight line, representing potential GDP, is drawn joining points N and L with their x-coordinate, GDP2, such that it is parallel to the point K to GDP1 with a dotted line.
-Refer to Figure 8.6.Potential GDP equals $100 billion.The economy is currently producing GDP₁ which is equal to $90 billion.If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP?

Question

Figure 8.6

Alt text for Figure 8.6: In figure 8.6, a graph depicting potential GDP.
Long description for Figure 8.6: The x-axis is labelled, real GDP, Y (billions of 2007 dollars) , with values GDP1 and GDP2 marked.The y-axis is labelled, real aggregate expenditure, AE (billions of 2007 dollars) .Line AE1, begins a little less than half way along the x-axis and slopes up to the end of the x-axis.Line AE2, begins at a point half way along the x-axis and slopes up to the top right corner.Line AE2 is to the left of AE1 and is on a similar path as line AE1.Line Y = AE, originates at the vertex and slopes up to the top right corner.Line Y = AE meets line AE1 at point K, half way along both lines.Line Y = AE meets line AE2 at point N, plotted close to the right end of line AE2.Point J is plotted a little less than half way along line AE1, to the left of point K.Point L is plotted close to the right end of line AE1, to the right of point K.Point K is connected to its x-coordinate, GDP1, with a dotted line.A straight line, representing potential GDP, is drawn joining points N and L with their x-coordinate, GDP2, such that it is parallel to the point K to GDP1 with a dotted line.
-Refer to Figure 8.6.Potential GDP equals $100 billion.The economy is currently producing GDP₁ which is equal to $90 billion.If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP?

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) = 1/(1-0.8) = 5. To close the $10 billion gap between current GDP ($90 billion) and potential GDP ($100 billion), autonomous spending must increase by $10 billion / 5 = $2 billion.

Figure 86 Alt Text for Figure 8