Refer to Figure 9.3 for the following questions.
Figure 9.3

-Suppose that in Figure 9.3, government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP₁ to GDP₂, and this amount is $400 billion. If the MPC is 0.75, then what is the distance between N and L or by how much did government spending change?
A)$100 billion
B)$200 billion
C)$10 billion
D)$300 billion

Question

Refer to Figure 9.3 for the following questions.
Figure 9.3
 
-Suppose that in Figure 9.3, government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP₁ to GDP₂, and this amount is $400 billion. If the MPC is 0.75, then what is the distance between N and L or by how much did government spending change?
A)$100 billion 
B)$200 billion 
C)$10 billion 
D)$300 billion

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which equals 1/(1-0.75) = 4. The increase in GDP ($400 billion) is a result of the initial increase in government spending multiplied by the multiplier. Therefore, the change in government spending is $400 billion divided by 4, which equals $100 billion.

Refer to Figure 9.3 for the Following Questions