Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

A) $10 billion.

B) $20 billion.

C) $27.8 billion.

D) $50 billion.

Question

Myles Donovan

Business

11 January, 04:44

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

A) $10 billion.

B) $20 billion.

C) $27.8 billion.

D) $50 billion.

+1

Answers (1)

Know the Answer?

Cassis · Answer 1

If he government increases spending by $10 billion, real GDP will increase by $27.8 billion. The right answer is C.

Explanation:

In order to calculate how much the real GDP will increase, we have to calculate the Expenditure multiplier with the following formula:

Expenditure Multiplier = [1 / (1-MPC (1-tax) ]

Expenditure Multiplier = [1 / (1-0.8 (1-0.2) ]

Expenditure Multiplier = [1 / (1-0.8 (0.8) ]

Expenditure Multiplier = [1 / (0.36) ]

Expenditure Multiplier = 2.778

So, an increase in G by $10 billion will increase real GDP by $10 x 2.778 = $27.8 billion.

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:A) $10 billion.B) $20 billion.C) $27.8 billion.D) $50 billion.