Refer to Figure 12-4. Potential GDP equals $500 billion. The economy is currently producing GDP 1 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
Ans: C) $10 billion
Potential GDP = $500 billion
The economy is currently producing at GDP1 and GDP1= $450 billion
MPC=0.8
MPS= 1-0.8
=0.2
Multiplier = 1/MPS
=1/0.2
=5
The gap in the GDP = Potential - Actual GDP
=500 - 450
=$50 billion
The autonomous spending must be increased by = The gap in the GDP / Multiplier
=$50/5
=$10 billion
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