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The Greek government decides to introduce new austerity measures, which reduce government direct spending by $16 billion. Greece has a marginal propensity to consume of 0.6. What will be the final change in real GDP as a result of this decreased spending? Please give your answer as a whole number in billions of dollars.

Respuesta :

Answer:

-$40 billion

Explanation:

Given that

Reduction in government spending = $16 billion

Marginal propensity to consume = 0.6

Change in spending = $16 billion

Based on the above information

As we know that

Multiplier = 1 ÷ (1 - MPC)

= 1 ÷ (1 - 0.06)

= 1 ÷ 0.4

= 2.5

Now  

The final change in real GDP is

= Multiplier × Change in spending

= 2.5 × -$16 billion

= -$40 billion