Question

Businesses in the nation of Islandia have been accumulating cash because they have a pessimistic outlook of the national economy Recent changes in the economic outlook of Islandia have caused business leaders to Suppose that businesses in the country invest a total of $30 billion of this cash. begin to invest some of their accumulated cash Instructions: Enter a positive number to show an increase and a negative number to show a decrease.
a. What would be the maximum expected change in GDP if Islandia's marginal propensity to consume (MPC) is 0.8?
$ _______ billion
b. Suppose that the recent economic outlook in the country of Mountainia has been the opposite. Businesses have postponed planned investments and have begun to accumulate cash. If businesses in Mountainia postpone $5 billion of their planned investments, what would be the maximum expected change in GDP if its marginal propensity to save (MPS) is 0.25?
$ ________ billion

Answer 1

Answer:

A) if the MPC = 0.8, then the MPS = 0.2, and the multiplier = 1 / 0.2 = 5

if investment increases by $30 billion, aggregate demand will increase by $150 billion ($120 billion in consumption and $30 billion in investment).

B) if Mountainia's MPS = 0.25, then the multiplier = 1 / 0.25 = 4

if $5 billion in investments are postponed, then the aggregate demand will decrease by $20 billion ($15 billion in consumption and $5 billion in investment)