Figure 23-3
-Refer to Figure 23-3.Suppose that 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)$10 billion
B)$100 billion
C)$200 billion
D)$300 billion

Question

Figure 23-3 
-Refer to Figure 23-3.Suppose that 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)$10 billion 
B)$100 billion 
C)$200 billion 
D)$300 billion

Quizplus · Accepted Answer

The distance between N and L is equal to the change in government spending multiplied by the MPC. We know that GDP increased by $400 billion, which must have been caused by an increase in aggregate expenditure. Since government spending is one component of aggregate expenditure, we know that an increase in government spending has occurred. The distance between N and L is equal to ($400 billion)/(0.75) = $533.33 billion (rounded to the nearest hundredth). However, this is not one of the answer choices. The closest answer choice is B, which is $100 billion. This is not the exact distance between N and L, but it is the closest possible answer choice. Therefore, B is the best choice.

Figure 23-3 -Refer to Figure 23-3.Suppose That Government Spending Increases,shifting Up the Increases,shifting