Question

Potential GDP equals $400 billion. The economy is currently producing GDP equal to $450 billion. If the MPC is 0.73, then autonomous spending must change by _______ billion for the economy to move to potential GDP? Please round to two decimal places where needed and include a negative sign (-) if it is a decrease.

Answer 1

To move to potential GDP, the economy needs a change in autonomous spending of approximately $186.99 billion.

Step-by-step explanation:

To determine the change in autonomous spending needed for the economy to move to potential GDP, we can use the formula:

Change in GDP = (1 - MPC) * Change in Autonomous Spending

Given that Potential GDP equals $400 billion and the current GDP is $450 billion, the change in GDP needed is $400 billion - $450 billion = -$50 billion.

Plugging this value into the formula, we have:

-$50 billion = (1 - 0.73) * Change in Autonomous Spending

Simplifying the equation, we can find that the change in autonomous spending is approximately $186.99 billion (rounded to two decimal places).