International trade, and changes in the aggregate price level.

a. Suppose that the MPC is equal to 0.75. What was the size of the change in government purchases of goods and services that resulted in the increase in real GDP of $200 million?

b. Now suppose that the change in government purchases of goods and services was $20 million. What value of the multiplier would result in an increase in real GDP of $200 million?

c. Given the value of the multiplier you calculated in part b, what marginal propensity to save would have?

A) 50 millions

B) 10

C) 0.10

Explanation:

Government spending multiplier:

1 / (1-MPC) = 1/MPS

1 / (1-0.75) = 1/0.25 = 4

The government multiplier is 4 thus, to increase the GDP by 200 million the government spending should be of 50 millions as:

government spending x multiplier = increasein GDP

G x 4 = 200

G = 200/4 = 50

we are given with G and increase in GDP we should solve for multiplier:

government spending x multiplier = increasein GDP

20 x m = 200

m = 200 / 20 = 10

C) the multiplier is: 1 / (1-MPC) = 1/MPS

if m = 10 then:

1/MPS = 10

MPS = 1/10 = 0.10