Suppose the economy has no income taxes or imports. The MPC equals 0.8. What does the expenditure model predict will be the change in real GDP if investment increases by $200 billion?
What will be an ideal response?
The expenditure multiplier equals , so for the case in the question, the expenditure multiplier equals = = 5.0. The change in real GDP equals the expenditure multiplier multiplied by the change in investment, or 5.0 × $200 billion = $1,000 billion.
You might also like to view...
What is the shape of average cost curve? Provide the reason for that particular shape
Suppose an American worker can make 50 pairs of gloves or grow 300 radishes per day. On the other hand, a Bangladeshi worker can produce 100 pairs of gloves or grow 200 radishes per day. Which of the following statements is true? Bangladesh should:
A. specialize in glove production since it possesses the comparative advantage in glove production. B. despecialize in radish production since it possesses the comparative advantage in radish production. C. produceboth gloves and radishes since it has the absolute advantage in glove production. D. only produce radishes since it has the absolute advantage in radish production.