Figure 12-4
-Refer to Figure 12-4.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 autonomous spending change for the economy to move to potential GDP?

Question

Figure 12-4 Figure 12-4 -Refer to Figure 12-4.Potential GDP equals $100 billion.The economy is currently producing GDP<sub>1</sub> which is equal to $90 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP? A) -$18 billion B) -$2 billion C) $2 billion D) $18 billion

Figure 12-4 -Refer to Figure 12-4.Potential GDP equals $100 billion.The economy is currently producing GDP<sub>1</sub> which is equal to $90 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP? A) -$18 billion B) -$2 billion C) $2 billion D) $18 billion

-Refer to Figure 12-4.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 autonomous spending change for the economy to move to potential GDP?

Quizplus · Accepted Answer

The formula for the spending multiplier is 1/(1-MPC). Given an MPC of 0.8, the spending multiplier is 1/(1-0.8) = 5. Therefore, to reach potential GDP of $100 billion, autonomous spending must increase by (100 - 90)/5 = $2 billion. Therefore, the correct answer is C) $2 billion.

Figure 12-4 -Refer to Figure 12-4.Potential GDP Equals $100 Billion.The Economy Is