The Aggregate Expenditure (AE) model posits that holding prices constant, output (GDP) and therefore, unemployment and inflation rates depend on AE. Aggregate expenditure is defined as: AE = C + Ig+ G + Xn., where C is consumption, Igis gross private domestic investment, G is government purchases, and Xnis net exports.

As the result of the current economic downturn, the forecasters expect real consumer spending to fall by 4.7%, business investments to drop by 24.6%, Government purchases to increase by 10%, and inflation rate to remain flat in 2020.

Below is the breakdown of the 2019 Real Gross Domestic Product (GDP) in trillions of dollars. Explain what would be the impact of these changes in spending on the overall real GDP of the United States in 2020, given marginal propensity to consume (MPC) to be equal to 0.6 (Hint: use multiplier effect to look at change in output as the result of change in spending). Calculate actual changes in each component of spending and use that to come up with answers.

Components of Real GDP (2019) Amount Component (trillions) Percent Personal Consumption Goods Durable Goods Non-durable Goods Services Business Investment Fixed Non-Residential Commercial Real Estate Capital Goods Intellectual (Software) Residential Change in Inventories Net Exports Exports Imports Government . 17% Federal . 7% Defense . 4% State and Local $2.02 10% TOTAL GDP $19.07 1(1)%