The U. S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

Question

History

Guest

3 November, 04:28

The U. S. economy slowed significantly in early 2008, and policy makers were extremely concerned about growth. To boost the economy, Congress passed several relief packages (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) that combined would deliver about $700 billion in government spending. Assume, for the sake of argument, that this spending was in the form of payments made directly to consumers. The objective was to boost the economy by increasing the disposable income of American consumers. a. Calculate the initial change in aggregate consumer spending as a consequence of this policy measure if the marginal propensity to consume (MPC) in the United States is 0.5. Then calculate the resulting change in real GDP arising from the $700 billion in payments.

+5

Answers (1)

Know the Answer?

Jonas Knight · Answer 1

Calculate the proportion of the package that would be really transferred to consumers, by using the MPC. So, you proceed to divide the change in disposable income (700 million) between the MPC, to measure the change in the consume. Then, this will be the change in the real GDP.

So.

ΔC=700/0.5

ΔC = 1,400

Explanation:

Change in real GDP, under this assumption would be of 1,400 millions ceteris paribus.