Suppose that an initial $40 billion increase in investment spending expands GDP by $40 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $32 billion in the second round of the process.

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 $32 billion in the second round, what would have been the size of the multiplier?

Question

Business

Alanna Beasley

27 November, 23:02

Suppose that an initial $40 billion increase in investment spending expands GDP by $40 billion in the first round of the multiplier process. Also assume that GDP and consumption both rise by $32 billion in the second round of the process.

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 $32 billion in the second round, what would have been the size of the multiplier?

+2

Answers (1)

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Mariam · Answer 1

A. What is the MPC in this economy?

Marginal propensity to consume (MPC) = increase in consumption in the second round / initial investment spending increase = $32 / $40 = 0.8

B. What is the size of the multiplier?

multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5

C. If, instead, GDP and consumption both rose by $32 billion in the second round, what would have been the size of the multiplier?

the same as A and B, since the question already states that consumption increased by $32 billion in the second round: MPC = 0.8, and multiplier = 5