ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$1, 000 decrease
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$5, 000 increase
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$4, 000 decrease
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$6, 000 increase
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$8, 000 increase
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Detailed explanation-1: -Real GDP can be calculated by taking the difference between the most recent year’s real GDP and the prior year’s real GDP. Then, divide this difference by the prior year’s real GDP. Alternatively, real GDP can be determined if nominal GDP and the prevailing inflation rate are known.
Detailed explanation-2: -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).
Detailed explanation-3: -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-4: -Real gross domestic product (GDP) increased at an annual rate of 2.7 percent in the fourth quarter of 2022, after increasing 3.2 percent in the third quarter.