Question

Suppose that the marginal propensity to consume is 0.75 and that there is a decrease in autonomous aggregate spending of $20 million. Everything else held constant, the multiplier is equal to ______ and real GDP will ______.

Answer 1

Answer:

Multiplier is equal to 3, and real GDP reduces by $60 million.

Explanation:

Marginal propensity to consume is defined as the percentage of one's income that he will spend, so a MPC of 75% of their income will be reserved for spending.

To calculate multiplier from MPC use the formula.

Multiplier = MPC/(1-MPC)

Multiplier = 0.75/(1-0.75)

Multiplier= 3

Real GDP is the total monetary value of all output in a country that has been adjusted for inflation or deflation.

Multiplier= change in real GDP/change in spending

Cross-multiply

Change in real GDP= multiplier* change in spending

Change in real GDP= 3* (-20 million)

Change in real GDP= -$60 million

Answer 2

Answer: Multiplier = 4 ; real GDP decrease by $80,000,000

Explanation:

GIVEN THE FOLLOWING ;

Marginal Propensity to Consume (MPC) = 0.75

Change in aggregate spending = $20,000,000

The marginal propensity to consume is the ratio of change in what is spent to the total income.

Multiplier = 1 ÷ (1 - MPC)

Multiplier = 1 ÷ (1 - 0.75)

Multiplier = 1÷0.25 = 4

Real Gross Domestic Product (GDP) = Multiplier × change in spending

Real GDP = 4 × $20,000,000 = $80,000,000 decrease