Suppose that an economy is an equilibrium at a real GDP of $12 trillion at a price level of 100. An increase in autonomous expenditures of $0.30 will take place. The current multiplier is 5. The...

Suppose that an economy is an equilibrium at a real GDP of $12 trillion at a price level of 100. An increase in autonomous expenditures of $0.30 will take place. The current multiplier is 5. The short-run aggregate supply curve is horizontal the new equilibrium value of real GDP will be _________?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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I wonder if you have made a mistake in typing this question.  A change in autonomous expenditures of less than $1 ($.30) will have a negligible effect on GDP when the previous equilibrium GDP is $12 trillion.  The actual change in GDP would be $1.50, which is not a real change in GDP.  I will discuss how to answer this question so you can plug in a different number and find the right answer.

There are three factors in this question that matter.  First, it is important that we know that the short run aggregate supply curve (SRAS) is horizontal.  That means that there will be no increase in the price level when consumption rises.  Second, it is important that we know that the current equilibrium GDP is $12 trillion.  That will be our starting point and we will add any increase to that figure.  Finally, it is important to know that the multiplier is 5.  We will need to multiply the change in autonomous expenditures by 5 to get the change in real GDP.

For example, then, if autonomous expenditures increase by $1 billion, GDP will actually rise by $5 billion and the new RGDP will be $12.005 trillion.  If autonomous expenditures increase by $10 billion, RGDP will actually rise by $50 billion and the new equilibrium RGDP will be $12.05 trillion.  If the change in autonomous expenditures is $.3 trillion, then the actual increase is $.15 trillion and your new equilibrium RGDP is $12.15 trillion.

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