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Homework answers / question archive / By how much will GDP change if firms increase their investment by $12 billion and the MPC is 0
By how much will GDP change if firms increase their investment by $12 billion and the MPC is 0.8?
a.The change in GDP = $_ billion.
b. If the MPC is 0.5? The change in GDP = $ billion
a.
Step 1: calculate the GDP multiplier
GDP multiplier = 1 / (1 - MPC)
Where:
MPC = Marginal Propensity to Consume = 0.8
Hence:
GDP multiplier = 1 / (1 - 0.8) = 5
Step 2: multiply the GDP multiplier by a change in investment to obtain the change in GDP.
5 * 12 = $60 billion
b.
Step 1: calculate the GDP multiplier
GDP multiplier = 1 / (1 - MPC)
Where:
MPC = Marginal Propensity to Consume = 0.5
Hence:
GDP multiplier = 1 / (1 - 0.5) = 2
Step 2: multiply the GDP multiplier by a change in investment to obtain the change in GDP.
2 * 12 = $24 billion
