ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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If the government cuts spending by $50 and the MPC is 0.9, how much will GDP change by?
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$500 increase in GDP
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$500 decrease in GDP
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$450 increase in GDP
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$450 increase in GDP
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$5 decrease in GDP
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Explanation:
Detailed explanation-1: -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-2: -If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: $250 million.
Detailed explanation-3: -If the government decreased its spending by $400, and the GDP decreased $1, 000 as a result, the MPC must be: A. 0.60.
Detailed explanation-4: -The Spending Multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-MPC or 1/MPS
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