Question

At an initial point on the aggregate demand curve, the price level is$125$, and real GDP is $S18$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 $\backslash )0.7$. What is the level of real GDP at the new point on the aggregate demand curve?

Short answer

The new level of real GDP ang the consumption of the formula and the economy given level of prices and particula time and the new lwvwl of real GDP.

Step-by-step solution

 The total amount of given good services.

Aggregate demand is the total amount of goods and services demanded by the economy for the given level of prices at a particular time. It is calculated as the sum of consumption, government spending, investment and net export.

The equalibrium level of real GDP.

In the question it is given that the price level is$\$125$and real GDP is $\$18$trillion. If the level of price falls to$\$120$the autonomous expenditure will rise by$\$250$billion.

Marginal propensity to consume is $0.75$.

The equilibrium level of real GDP is equal to the value of multiplier time's autonomous expenditure. It is shown by the formula below:

$Y=k\times a$ $Y=$where, Real GDP

$K=$Multıplier

$a=$Autonomous Expenditure

The value of multiplier.

The value of multiplier is calculated by the formula given below:

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

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

$=4$

The autonomous expenditure is increased by$\mathbf{\$}\mathbf{250}\mathbf{\text{billion}}$or $\mathbf{0}\mathbf{.}\mathbf{25}$trillion.

According to the formula of the equilibrium level of real GDP given above, the change in real GDP will be equal to:

$Y=k\times a$

$=4\times \$0.25$

$=\$1$

The change in real GDP with the fall in prices is equal to$\$1$ trillion

The level of real GDP.

The new level of real GDP will be equal to:

$\text{Real GDP}=\$18+\$1$

$=\$19$

Thus, Real GDP at price $\$120$will be equal to $\$19$trillion