Question

At an initial point on the aggregate demand curve, the price level is $125$ , and real GDP is $\backslash (18$ trillion. When the price level falls to a value of$120$ , total autonomous expenditures increase by $\backslash )250$ billion. The marginal propensity to consume is $0.75$. What is the level of real GDP at the new point on the aggregate demand curve?

Short answer

As a result, at the current price of $\$120$, Real GDP equals $\$19$trillion.

Step-by-step solution

Goods and Services.

The entire amount of goods and services demanded by the economy at a given price level is known as aggregate demand. Consumption, government spending, investment, and net export are all factored into the equation.

Autonomous expenditure.

The price level is $\$125$ and the real GDP is $\$18$ trillion in the question. If the price drops to $\$120$, the autonomous spending will increase by $\$250$ billion.

role="math" localid="1651571099727" $0.75$ is the marginal propensity to consume.

The value of multiplier time's autonomous expenditure equals the equilibrium level of real GDP. The formula below demonstrates this.

$Y=k\times a$

$where,Y=RealGDP$

$K=Multiplier$

$a=AutonomousExpenditure$

Calculation for the equilibrium.

The following formula is used to calculate the value of a multipler:

$k=\frac{1}{1-MPC}$

$=\frac{1}{1-0.75}$

$=4$

$\$250$billionor $\$0.25$trillion is added to the autonomous expenditure.

The change in real GDP will be equal to: according to the calculation for the equilibrium level of real GDP stated above:

$Y=k\times a$

$=4\times \$0.25$

role="math" localid="1651571825507" $=\$1$

The change in real GDP as a result of falling prices is equal to $\$1$trillion.

Real GDP.

The new real GDP level will be equal to:

$RealGDP=\$18+\$1$

$=\$19$

As a result, at a price of $\$120$, Real GDP equals $\$19$trillion.