4. a) Real GDP is currently $4,500 billion, and potential GDP is $4,600 billion. If government spending increases by $35 billion, what does the multiplier equal to? Show the effect the change will have on macroeconomic equilibrium. b) By how much does taxes have to change to create the same effect?
Added by Alex C.
Close
Step 1
Assuming that the MPC is 0.8 (meaning that 80% of any increase in income is spent), the multiplier would be: Multiplier = 1 / (1 - 0.8) = 5 This means that for every $1 increase in government spending, the overall GDP will increase by $5. To see the effect on Show more…
Show all steps
Your feedback will help us improve your experience
Nick Johnson and 78 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP, if the MPC is 0.8? A. Real equilibrium GDP will rise by $500 billion. B. There will be no change in real equilibrium GDP. C. Real equilibrium GDP will fall by $100 billion. D. Real equilibrium GDP will rise by $100 billion.
Azat N.
Suppose that the real GDP of a country is in equilibrium at $480 billion. Now suppose that planned investment decreases by $4 billion and that this decrease causes real GDP to shift to a new equilibrium level of $470 billion. a. What is the spending multiplier for this country? b. What is the marginal propensity to save (MPS) for this country?
Jonathan T.
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD