FIGURE 23-5 Refer to Figure 23-5.Suppose that an increase in autonomous investment caused the AD curve to shift to the right,as shown.If the simple multiplier in this model is 4,then how much was the increase in investment?
A)30
B)40
C)50
D)12
E)not enough information to know

Question

FIGURE 23-5 Refer to Figure 23-5.Suppose that an increase in autonomous investment caused the AD curve to shift to the right,as shown.If the simple multiplier in this model is 4,then how much was the increase in investment?
A)30 
B)40 
C)50 
D)12 
E)not enough information to know

Quizplus · Accepted Answer

From the diagram, we see that a rightward shift of the AD curve leads to an increase in equilibrium output (Y) from 3600 to 4000, a difference of 400. Using the simple multiplier model where ∆Y = k ∆I, where k is the simple multiplier, we can solve for ∆I as follows:

400 = 4 ∆I

∆I = 100

Therefore, a $100 increase in autonomous investment led to a $400 increase in equilibrium output. However, since the answer choices are in integers, the closest option is $50 (Option C) which would lead to a $200 increase in equilibrium output.