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Georgia [21]
3 years ago
9

As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage

economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.7, and the amount of new government spending is $600 billion.a. What is the multiplier? (Compute this to the first place beyond the decimal)b. By how much would the economy be stimulated?
Business
1 answer:
OverLord2011 [107]3 years ago
5 0

Answer: <em>a. Multiplier = 3.33</em>

<em>b. Stimulation = $2000 billion</em>

Explanation:

In this particular case , it's given:

Marginal propensity to consume(MPC) = 0.7

Government spending = $600 billion

Therefore, we can evaluate the  multiplier using the following formula:

Multiplier\ = \frac{1}{(1-MPC)}

Multiplier\ = \frac{1}{1-0.7}

Multiplier = 3.33

Noe, in order to find the stimulation in the economy we will multiple the new government spending with the multiplier. We will get ;

Stimulation\ = Government\ spending\times Multiplier

Stimulation\ = 600\times3.33

Stimulation = $2000 billion

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