If the price level is constant and the slope of the AE curve is 0.75, a decrease in government expenditures of $100 leads to a decrease in real GDP of
A) $25.
B) $100.
C) $400.
D) $800.

Question

Quizplus · Accepted Answer

The slope of the AE curve (0.75) represents the marginal propensity to consume (MPC). The multiplier is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. A decrease in government expenditures of $100 leads to a decrease in real GDP of 4 times that amount, which is $400.

If the Price Level Is Constant and the Slope of the AE