Figure 23-4
-Refer to Figure 23-4.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?
A)-$18 billion
B)-$2 billion
C)$2 billion
D)$18 billion

Question

Figure 23-4 
-Refer to Figure 23-4.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?
A)-$18 billion 
B)-$2 billion 
C)$2 billion 
D)$18 billion

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. To increase GDP from $90 billion to $100 billion, a $10 billion increase is needed. Therefore, autonomous spending must change by $10 billion/5 = $2 billion.

Figure 23-4 -Refer to Figure 23-4.Potential GDP Equals $100 Billion.The Economy Is