In a simple economy in which prices are constant and with no income taxes or imports, the slope of the AE curve is 0.8. In order to increase real GDP by $500 billion, then
A) saving needs to be reduced by $500 billion will lead to the increase of $500 billion.
B) an increase in investment of $200 billion will lead to the increase of $500 billion.
C) consumption expenditure needs to increase by $500 billion.
D) an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. With a slope of the AE curve of 0.8, the MPC is 0.8, and the multiplier is 1/(1-0.8) = 5. Therefore, an increase in autonomous expenditure of $100 billion will lead to an increase in GDP of $100 billion * 5 = $500 billion.

In a Simple Economy in Which Prices Are Constant and with No