Question

By how much will GDP change if firms decrease their investment by $-8 billion and the MPC is 0.9? If the MPC is 0.8?

Answer 1

GDP stands for gross domestic product.

MPC stands for marginal propensity to consume (the ratio of the ratio of change in consumption to change in income)

From MPC you obtain the GDP Multiplier, which gives the relationship between a change in a particular expenditure and the GDP.

This is: Change in GDP = Mutliplier * Change in expenditure

The multiplier is equal to 1 / [ 1 - MPC].

Now use that information to calculations.

Change in GDP with MPC of 0.9

multiplier = 1 / [1 - 0.9 ] = 1 / 0.1 = 10
Change in GDP = 8 billions*10 = 80 billions.


Change in GDP with MPC of 0.8

multiplier = 1 / [1 - 0.8] = 1 /0.2 = 5
Change in GDP = 8 billions*5 = 40 billions