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Chapter 11: Q3. (page 237)

By how much will GDP change if firms increase their investment by $8 billion and the MPC is 0.80? If the MPC is 0.67?

Short Answer

Expert verified

GDP will change by $40 billion if MPC is 0.80.

GDP will change by $24.24 billion if MPC is 0.67.

Step by step solution

01

Step 1. Calculation for a change in GDP at MPC equal to 0.80

Change in GDP is induced by a difference in the investment in proportion or multiple times the change in investment. The change in GDP depends on the consumption level in the economy. If the total spending is consumed more and saved less, the difference in income will be more prominent following the multiplier effect.

Given that increase in investment is $8 billion and MPC is 0.8, the increase in GDP can be calculated as follows:

k=11-MPC=11-0.8=5

∆GDP=k×∆Investment=5×8billion=$40billion

Thus, the GDP will increase by $40 billion.

02

Step 2. Calculation for change in GDP at MPC equal to 0.67

When MPC is 0.67, the change in GDP is as follows:

k=11-MPC=11-0.67=0.03

∆GDP=k×∆Investment=3.03×$8billion=$424.24billion

The GDP will increase by $24.24 billion.

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Most popular questions from this chapter

Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed economy?

True or False. If spending exceeds output, real GDP will decline as firms cut back on production.

Depict graphically the aggregate expenditures model for a private closed economy. Now show a decrease in the aggregate expenditures schedule and explain why the decline in real GDP in your diagram is greater than the decline in the aggregate expenditures schedule. What term is used for the ratio of a decline in real GDP to the initial drop in aggregate expenditures?

The economy’s current level of equilibrium GDP is \(780 billion. The full-employment level of GDP is \)800 billion. The multiplier is 4. Given those facts, we know that the economy faces _______ expenditure gap of ___________.

  1. an inflationary; \(5 billion

  2. an inflationary; \)10 billion

  3. an inflationary; \(20 billion

  4. a recessionary; \)5 billion

  5. a recessionary; \(10 billion

  6. a recessionary; \)20 billion

Why is saving called a leakage? Why is a planned investment called an injection? Why must saving equal planned investment at equilibrium GDP in a private closed economy? Are unplanned changes in inventories rising, falling, or constant at equilibrium GDP? Explain.
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