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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. By how much would the economy be stimulated?

Respuesta :

Answer:

$2,000 billion

Explanation:

We calculate the value multiplier. We get the multiplier by using the equation, ms= 1 ÷ (1 – MPC).

ms= 1÷(1-0.7)

ms= 1÷(0.3)

ms=3.33

With a marginal propensity to consume of 0.7, our multiplier is gotten as 3.3. An increase in government spending of $600 billion been multiplied by the multiplier will give us $2,000 billion increase in real GDP. So the GPD for for marginal propensity consume of 0.7 is $2,000 billion.

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