ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Real GDP will increase by exactly $9 billion
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Real GDP will increase by exactly $10 billion
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Real GDP will increase by less that $9 billion
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Real GDP will not change
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Real GDP will increase by more than $10 billion
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Detailed explanation-1: -Suppose that marginal propensity to consume is equal to 0.9, and the government increases its spending by $200 billion. This new increase in spending is financed by a fresh increase in taxes equal to $200 billion. As a result of this, GDP will: increase by $200 billion.
Detailed explanation-2: -Which of the changes described below would be the most likely reason for a $40 billion increase in Bloominonionland’s real GDP? Investment spending in Gerbilia decreased by $6 billion.
Detailed explanation-3: -63. Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula: d. 1 / (1 − MPC).
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).