Figure 23-4

-Refer to Figure 23-4. Potential GDP equals $500 billion. The economy is currently producing GDP₁ which is equal to $450 billion. If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A) -$40 billion
B) -$10 billion
C) $10 billion
D) $40 billion

Question

Figure 23-4
 
-Refer to Figure 23-4. Potential GDP equals $500 billion. The economy is currently producing GDP₁ which is equal to $450 billion. If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A) -$40 billion 
B) -$10 billion 
C) $10 billion 
D) $40 billion

Quizplus · Accepted Answer

The formula for calculating the change in equilibrium GDP due to a change in autonomous spending is:
ΔGDP = (1 / (1 - MPC)) x Δautonomous spending
Here, MPC = 0.8
To move from GDP₁ to potential GDP, we need to increase GDP by:
ΔGDP = potential GDP - GDP₁ = $500 billion - $450 billion = $50 billion
So, we can use the above formula to find the necessary change in autonomous spending:
$50 billion = (1 / (1 - 0.8)) x Δautonomous spending
Δautonomous spending = $10 billion (rounded to the nearest billion)

Figure 23-4 -Refer to Figure 23-4. Potential GDP Equals $500 Billion. the Equals