Refer to Figure 9.4 for the following question.
Figure 9.4

-In Figure 9.4, assume that potential GDP equals $100 billion. The economy is currently producing GDP₁ which is equal to $90 billion. If the MPC is 0.8, then how much must spending change for the economy to move to potential GDP?
A)-$2 billion
B)$2 billion
C)$18 billion
D)-$18 billion

Question

Refer to Figure 9.4 for the following question.
Figure 9.4
 
-In Figure 9.4, assume that potential GDP equals $100 billion. The economy is currently producing GDP₁ which is equal to $90 billion. If the MPC is 0.8, then how much must spending change for the economy to move to potential GDP?
A)-$2 billion 
B)$2 billion 
C)$18 billion 
D)-$18 billion

Quizplus · Accepted Answer

To move the economy to its potential GDP of $100 billion from its current GDP of $90 billion, an increase in spending is needed. The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, to increase GDP by $10 billion (from $90 billion to $100 billion), spending must increase by $10 billion / 5 = $2 billion.

Refer to Figure 9.4 for the Following Question