Question

Consider the current equilibrium real GDP level of \( 18.0 trillion displayed in Table 12-2. Based on your answer to Problem 4, if real government spending were to decrease by \)1.0 trillion, what would be the resulting change in real GDP? What would be the new equilibrium level of real GDP? Verify that at the new level of government spending, this new equilibrium real GDP equals C+I+G+NX.

Short answer

The real GDP falls by$\$5$trillion and a new equilibrium level of real GDP is $\$13$trillion

Step-by-step solution

introduction

Gross domestic product (GDP) is the standard proportion of the worth added made through the production of labour and products in a country during a certain period.

explanation

Change in real GDP = $∆Y$

Change in government spending = $∆G$

we know,

$\mathrm{\Delta }Y=\frac{\mathrm{\Delta }G}{1-mpc}$mpc = $0.8$

$\Rightarrow \mathrm{\Delta }Y=\frac{-1}{1-0.8}=-5$

The real GDP falls by $\$5$trillion and a new equilibrium level of real GDP is $\$13$trillion.

The equilibrium at new GDP is GDP = C+I+G+NX.