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24 November, 17:28

An increase in government spending of $200 million financed by a new tax of $200 million in an economy with a marginal propensity to consume of. 90 could result in an increase in nominal GDP (assuming a closed economy with no leakages) of up to how much? (a) $0; (b) $2,000 million; (c) $180 million; (d) $200 million.

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  1. 24 November, 20:26
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    (d) $200 million.

    Explanation:

    For computing the increase in nominal GDP first we have to determine the net tax which is equal to

    = 0.90 * $200 million

    = $180 million

    So, the net increase in government spending is

    = $200 million - $180 million

    = $20 million

    And, we know that

    Multiplier = 1 : (1 - MPC)

    = 1 : (1 - 0.9)

    = 1 : 0.1

    = 10

    So, the increase in nominal GDP is

    = $20 million * 10

    = $200 million
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