As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. The marginal propensity to consume is 0.7, and the amount of new government spending is $600 billion.a. What is the multiplier? (Compute this to the first place beyond the decimal)b. By how much would the economy be stimulated?

Question

contestada

Respuesta :

enyo enyo · Answer 1 · 2019-12-10T08:15:09+01:00

Answer: a. Multiplier = 3.33

b. Stimulation = $2000 billion

Explanation:

In this particular case , it's given:

Marginal propensity to consume(MPC) = 0.7

Government spending = $600 billion

Therefore, we can evaluate the multiplier using the following formula:

[tex]Multiplier\ = \frac{1}{(1-MPC)}[/tex]

[tex]Multiplier\ = \frac{1}{1-0.7}[/tex]

Multiplier = 3.33

Noe, in order to find the stimulation in the economy we will multiple the new government spending with the multiplier. We will get ;

[tex]Stimulation\ = Government\ spending\times Multiplier[/tex]

[tex]Stimulation\ = 600\times3.33[/tex]

Stimulation = $2000 billion