Figure 12-3
-Refer to Figure 12-3.Suppose that government spending increases,shifting up the aggregate expenditure line.GDP increases from GDP1 to GDP2,and this amount is $200 billion.If the MPC is 0.8,then what is the distance between N and L or by how much did government spending change?
A)$16 billion
B)$40 billion
C)$200 billion
D)$1,000 billion

Question

Figure 12-3 
-Refer to Figure 12-3.Suppose that government spending increases,shifting up the aggregate expenditure line.GDP increases from GDP1 to GDP2,and this amount is $200 billion.If the MPC is 0.8,then what is the distance between N and L or by how much did government spending change?
A)$16 billion 
B)$40 billion 
C)$200 billion 
D)$1,000 billion

Quizplus · Accepted Answer

The distance between N and L on the vertical axis represents the change in equilibrium GDP due to the increase in government spending. This change is equal to the multiplier (1/(1-MPC)) multiplied by the change in government spending.

So, the multiplier is 1/(1-0.8) = 5.

And the change in equilibrium GDP is $200 billion.

Therefore, the change in government spending is $200 billion divided by the multiplier (5), which equals $40 billion.

Figure 12-3 -Refer to Figure 12-3.Suppose That Government Spending Increases,shifting Up the Increases,shifting