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?
A)-$18 billion
B)-$2 billion
C)$2 billion
D)$18 billion

Question

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?
A)-$18 billion 
B)-$2 billion 
C)$2 billion 
D)$18 billion

Quizplus · Accepted Answer

To find the change in autonomous spending needed, use the formula for the spending multiplier: 1/(1-MPC). Here, MPC is 0.8, so the multiplier is 5. The GDP gap is $100 billion - $90 billion = $10 billion. To close this gap, autonomous spending must change by $10 billion / 5 = $2 billion.

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