Figure 12-3 Real aggregate expenditure, AE (trillions of dollars) Y=AE AE AE 45°

Question

Figure 12-3 Real aggregate expenditure, AE (trillions of dollars) Y=AE AE AE 45° GDP, GDP Real GDP, Y 2 (trillions of dollars) ) Refer to Figure 12-3. Suppose that investment spending decreases by $5 million, decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is 0.8, t what is the change in GDP? 2 24) A)-$4 million B) -$5 million C) -$25 million D) -$40 million 25) The required reserves of a bank equal its the required reserve ratio. 25) A) loans divided by C) loans multiplied by B) deposits multiplied by D) deposits divided by

Explanation / Answer

24.

Correct Answer:

A.-$4Million

Working note:

MPC = Change in consumption/change in investment spending

Change in consumption = .8*(-5) = -$4Million

25.

Correct Answer:

B.

Working note:

Required reserve = Deposits * required reserve ratio

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