Suppose that an initial $40 billion increase in investment spending expands GDP

Q: Suppose that an initial $40 billion increase in investment spending expands GDP

a. MPC = consumption / income = 24 / 40 = 0.6 b. The multiplier = 1 / 1-MPC = 1/ 1-0.6 = 2.5 c. If instead, GDP and consumption increases by $32 billion after the $40 billion increases the MPC = $32/$40 = 0.8 The Multiplier = 1/ 1-0.8 = 5

ID: 1202034 • Letter: S

Question

Suppose that an initial $40 billion increase in investment spending expands GDP by $40 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $24 billion in the second round of the process. Instructions: Round your answers to 1 decimal place. a. What is the MPC in this economy? $. b. What is the size of the multiplier? . c. If, instead, GDP and consumption both rose by $32 billion in the second round, what would have been the size of the multiplier? .

Explanation / Answer

MPC = consumption / income

= 24 / 40 = 0.6

The multiplier = 1 / 1-MPC = 1/ 1-0.6 = 2.5

If instead, GDP and consumption increases by $32 billion after the $40 billion increases the MPC = $32/$40 = 0.8

The Multiplier = 1/ 1-0.8 = 5

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Suppose that an initial $40 billion increase in investment spending expands GDP

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