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4 October, 17:53

Suppose that an initial $ 10 billion increase in investment spending expands GDP by $ 10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $ 6 billion in the second round of the process.

Instructions: In parts a and b, round your answers to 1 decimal place. In part c enter your answer as a whole number.

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 $ 8 billion in the second round, what would have been the size of the multiplier?

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Answers (1)
  1. 4 October, 18:50
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    Part a: The value of MPC in the economy is 0.6

    Part b: The value of Multiplier in the economy is 25.

    Part c: The value of Multiplier in the economy is 50.

    Explanation:

    Part A

    The value of MPC is given as

    MPC=Change in Consumption/Change in Income

    MPC=6/10=0.6

    So the value of MPC in the economy is 0.6

    Part B

    The size of the multiplier is give as

    Multiplier=1 / (1-MPC)

    Multiplier=1 / (1-0.6)

    Multiplier=1/0.4=25

    So the value of Multiplier in the economy is 25.

    Part C

    The value of multiplier if the consumption and GDP is rose by $8 billion is given as

    MPC=Change in Consumption/Change in Income

    MPC=8/10=0.8

    Multiplier=1 / (1-MPC)

    Multiplier=1 / (1-0.8)

    Multiplier=1/0.2=50

    So the value of Multiplier in the economy is 50.
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