Subpart (a):
Multiplier, MPC and change in GDP .
Subpart (a):
Explanation of Solution
Multiplier can be calculated as follows:
Multiplier is 2.5. If the MPS is 0.4, the multiplier will be 2.5.
If the MPS is 0.6 then the multiplier can be calculated as follows:
If MPS is 0.6, the multiplier will be 1.667. If the MPS is 1 then the multiplier will be infinity or undefined.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (b):
Multiplier, MPC and change in GDP.
Subpart (b):
Explanation of Solution
If MPC is 1, then the multiplier will be infinity or undefined. If MPC is 0.90, then the multiplier can be calculated as follows:
Hence, when MPC is 0.90, then the multiplier will be 10.
If MPC is 0.67, then multiplier can be calculated as follows:
Hence, when MPC is 0.67, then the multiplier will be 3.
If the MPC is 0.50, then the multiplier can be calculated as follows:
Hence, when MPC is 0.50 the multiplier will be 2.
If MPC is 0, then the multiplier can be calculated as follows:
Hence when MPC is 1, then the multiplier will be 1.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (c):
Multiplier, MPC and change in GDP.
Subpart (c):
Explanation of Solution
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $40 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Subpart (d):
Multiplier, MPC and change in GDP.
Subpart (d):
Explanation of Solution
In case, if 0.67 is MPC, the change in GDP will be equal to $24 billion. In this case, the multiplier will be 3.
Multiplier can be calculated as follows:
Change in the level of GDP can be calculated as follows:
Hence, the change in GDP is by $24.24 billion.
Concept Introduction:
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.
GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.
Want to see more full solutions like this?
Chapter 10 Solutions
MACROECONOMICS LL\AC 22
- Suppose that the MPC is .75 and the MPM is .1. What is the size of the multiplier?arrow_forwardIs the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?arrow_forwardI'm doing economics homework and I'm being asked to find the multiplier when the MPS is 0.12 and MPC is 0.88. I'm trying to follow the formula and not sure where I'm getting lost.arrow_forward
- Suppose that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process. what is the MPC? What is the size of the Multiplier? If, instead, GDP and consumption both rose by $8 billion in the second round, what would have been the size of the multiplier?arrow_forwardHow much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.75?arrow_forwardAs the MPC rises, the multiplier falls does not change increases falls by .05 for each .01 increase in the MPCarrow_forward
- How is it possible for investment spending to increase even in a period in which the real interest rate rises? Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direct (positive) relationship or is it an inverse (negative) relationship? How does the size of the multiplier relate to the size of the MPC? The MPS? What is the logic of the multiplier-MPC relationship?arrow_forwardIf a $20 increase in disposable income causes consumer spending to rise by $4, what is the multiplier?arrow_forwardFind the value of multiplier when MPC is equals to 0.70arrow_forward
- If MPC = 0.28 how much will be the additional investment required to increase income by 1300 also find the multiplier?arrow_forwardAn Economy has no imports or taxes, the MPC is 0.90 and real GDP is $12 trillion. If businesses increase investment by $0.1 trillion: 1. Calculate the multiplier? 2. Calculate the change in real GDP? 3. Calculate the new level of real GDP?arrow_forwardUse the graph to answer the questions that follow. a.What is the value of the MPC?b.What is the value of the MPS?c.What is the value of the multiplier?d.What is the amount of unplanned investment at aggregateoutput of 300, 900, and 1,300?arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning