If the MPE is equal to .7, the baseline level of spending is $4 trillion, a one percentage point decrease in the real interest rate increases investment spending by $100 billion and exports by $20 billion, and the real interest rate is equal to 5%, then the equilibrium level of real GDP is
A) $11.733 trillion.
B) $5.028 trillion.
C) $1.056 trillion.
D) $14.933 trillion.

Question

Quizplus · Accepted Answer

The equilibrium level of real GDP can be calculated using the formula: GDP = Baseline Spending + Multiplier * Change in Spending. The multiplier is 1/(1-MPE) = 1/(1-0.7) = 3.33. A 1% decrease in interest rate increases spending by $120 billion ($100 billion investment + $20 billion exports). Thus, GDP = $4 trillion + 3.33 * $0.12 trillion = $11.733 trillion.

If the MPE Is Equal to