Question

Suppose the marginal propensity to consume (MPC) is either 0.82, 0.75, or 0.55. a. For each value of the MPC, calculate the expenditure multiplier, or the impact of a one-dollar increase in government spending on GDP. Instructions: Enter a number rounded to one decimal place in each blank. MPC expenditure multiplier 0.82 4.6 0.75 4.0 0.55 1.2 b. For each value of the MPC, calculate the impact on GDP of a $250 million increase in government spending. Instructions: Enter a number rounded to one decimal place in each blank. MPC Impact on GDP 0.82 $ 0.75 $ 1000.0 0.55 $

Answer 1

Answer:

See the explanation below.

Explanation:

Multiplier = 1/(1-MPC)

a. For each value of the MPC, calculate the expenditure multiplier, or the impact of a one-dollar increase in government spending on GDP.

Multiplier for 0.82 = 1/(1-0.82) = 1/0.18 = 5.6

Multiplier for 0.75 = 1/(1-0.75) = 1/0.25 = 4.0

Multiplier for 0.55 = 1/(1-0.55) = 1/0.45 = 2.2

b. For each value of the MPC, calculate the impact on GDP of a $250 million increase in government spending.

For 0.82 MPC, Impact on GDP = 5.6 * 250,000,000 = $1,388,888,888.9

For 0.75 MPC, Impact on GDP = 4.0 *250,000,000 = $1,000,000,000.0

For 0.55 MPC, Impact on GDP = 2.2 *250,000,000 = $555,555,555.6