Q3. By how much will GDP change if f... [FREE SOLUTION]

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Chapter 11: Q3. (page 237)

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?

Short Answer

Expert verified

GDP will change by $40 billion if MPC is 0.80.

GDP will change by $24.24 billion if MPC is 0.67.

Step by step solution

Step 1. Calculation for a change in GDP at MPC equal to 0.80

Change in GDP is induced by a difference in the investment in proportion or multiple times the change in investment. The change in GDP depends on the consumption level in the economy. If the total spending is consumed more and saved less, the difference in income will be more prominent following the multiplier effect.

Given that increase in investment is $8 billion and MPC is 0.8, the increase in GDP can be calculated as follows:

$k = \frac{1}{1 - M P C} = \frac{1}{1 - 0.8} = 5$

$鈭� G D P = k 脳鈭� I n v e s t m e n t = 5 脳 8 b i l l i o n = $ 40 b i l l i o n$

Thus, the GDP will increase by $40 billion.

Step 2. Calculation for change in GDP at MPC equal to 0.67

When MPC is 0.67, the change in GDP is as follows:

$k = \frac{1}{1 - M P C} = \frac{1}{1 - 0.67} = 0.03$

$鈭� G D P = k 脳鈭� I n v e s t m e n t = 3.03 脳 $ 8 b i l l i o n = $ 424.24 b i l l i o n$

The GDP will increase by $24.24 billion.

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Possible Levels of Employment, Millions	Real Domestic Output (GDP = DI), Billions	Consumption, Billions	Saving, Billions (DI 鈥� C)
40	\)240	\(244	-\)4
45	260	260	0
50	280	276	4
55	300	292	8
60	320	308	12
65	340	324	16
70	360	340	20
75	380	356	24
80	400	372	28

Possible Levels of Employment, Millions	Real Domestic Output (GDP = DI), Billions	Consumption, Billions	Saving, Billions
40	\)240	$244
45	260	260
50	280	276
55	300	292
60	320	308
65	340	324
70	360	340
75	380	356
80	400	372

91影视

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?

Short Answer

Step by step solution

Step 1. Calculation for a change in GDP at MPC equal to 0.80

Step 2. Calculation for change in GDP at MPC equal to 0.67

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