Question

Assume that the marginal propensity to consume is 0.75, net exports decline by $10 billion, and government spending increases by $20 billion. Given that there is no crowding out, the equilibrium gross domestic product can increase by a maximum of:_______

Answer 1

Answer: $40 billion

Explanation:

The change will be determined by the value of the Multiplier.

The Multiplier shows how much a change in government spending and exports will impart GDP.

Multiplier =  1 / ( 1 - MPC)

= 1 / ( 1 - 0.75)

= 4

Change in GDP = Multiplier * (Government spending + exports)

= 4 * (20 billion -10 billion)

= 4 * 10

= $40 billion