Chapter 12, Problem 8P

To determine

The real autonomous consumption where the multiplier is equal to 5, current equilibrium GDP is $14 trillion and total real consumption spending is $12 trillion

Concept introduction:

MPC: Marginal propensity to consume is the percentage of the additional unit of currency that is consumed when the individual earns one more unit of currency.

Multiplier: K = 1 / (1-MPC)= 1 / MPS, where K is multiplier

Consumption: Portion of the consumed by the Individual.

As, Y = C + I + G, where Y stands for GDP, C for consumption, I for investment, G for government expenditure. Not taking net exports just for simplicity.

Also, Consumption (C) = Autonomous consumption + {MPC x (Income (Y) − Taxes (T))}