Figure 12-4
-Refer to Figure 12-4.Potential GDP equals $500 billion.The economy is currently producing GDP1 which is equal to $450 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A)-$40 billion
B)-$10 billion
C)$10 billion
D)$40 billion

Question

Figure 12-4 
-Refer to Figure 12-4.Potential GDP equals $500 billion.The economy is currently producing GDP1 which is equal to $450 billion.If the MPC is 0.8,then how much must autonomous spending change for the economy to move to potential GDP?
A)-$40 billion 
B)-$10 billion 
C)$10 billion 
D)$40 billion

Quizplus · Accepted Answer

The change in autonomous spending needed can be calculated using the spending multiplier formula: Multiplier = 1/(1-MPC). Here, MPC = 0.8, so the multiplier is 5. The GDP gap is $500 billion - $450 billion = $50 billion. To find the change in autonomous spending, divide the GDP gap by the multiplier: $50 billion / 5 = $10 billion.

Figure 12-4 -Refer to Figure 12-4.Potential GDP Equals $500 Billion.The Economy Is