ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase by $10 billion
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increase by 2.1 billion
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decrease by $4.29 billion
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increase by $4.29 billion
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Detailed explanation-1: -If the MPC is . 70 and investment increases by $3 billion, the equilibrium GDP will: increase by $10 billion.
Detailed explanation-2: -In an economy MPC is 0.75. If investment expenditure increases by 500 crores, calculate total increase in income and consumption expenditure. Total increase in income = Increase in investment x K = 500 x 4 = 2, 000 crores. Total increase in consumption expenditure = 0.75 of 2, 000 = 1, 500 crores.
Detailed explanation-3: -Use the MPC formula Using the above example, you can divide $3, 500 by $5, 000, which equals 0.7. This means that the consumer in the example spent 70% of every new dollar of disposable income they earned.
Detailed explanation-4: -To calculate the maximum change in GDP, use the spending multiplier. The formula for the spending multiplier is 1/MPS or 1/(1-MPC). In the example above, the multiplier would be 5 (1/. 2).