Chapter 16, Problem 7MCQ

To determine

The question requires us to determine the change in real GDP.

Explanation of Solution

Given,

Change in aggregate spending = $100 million

MPC = 0.8

Change in real GDP when aggregate spending rises by $100 million:

  $\begin{array}{c}\text{ΔY=}\frac{\text{1}}{\text{1-MPC}}\text{×ΔAS}\\ \text{=}\frac{\text{1}}{\text{1-0}\text{.8}}\text{×\$100}\text{million}\\ \text{=5×\$100}\text{million}\\ \text{=\$500}\text{million}\end{array}$ s

Real GDP will change by $500 million when aggregate spending increases by $100 million.

Therefore, option “d” is correct.