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Suppose the MPC = 0
Suppose the MPC = 0.70 and the federal government increases spending on breast cancer research by $20 billion. What is the value of the initial impact on real GDP? What is the value of the total impact on real GDP?
Expert Solution
1) Computation of Value of Initial Impact on Real GDP:
MPC = 0.70
Increase in government spending = $20 billion = First round impact on real GDP.
Second round impact = 0.70 * First Round Impact = 0.70 * $20 billion = $14 billion.
Third round impact = 0.70 * Second Round impact = 0.70 * $14 million = $9.8 billion.
2) Computation of Value of Total Impact on Real GDP:
Total impact = $20 billion*1/(1-MPC)
= $20 billion*1/(1-0.70)
= $20 billion*1/0.30
Total Impact = $66.67 billion
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