Homework Answers
Answer:
1) What is the eventual effect on real GDP if the government increases its purchases of goods and services by $60,000. Assume the marginal propensity to consume (MPC) is 0.75
Given the MPC, the multiplier can be calculated as follows:
M = 1/(1-MPC) = 1/(1-0.75) = 4
Increase in government purchases = $60,000
Therefore, increase in real GDP = $60,000 * 4 = $240,000
2) What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $60,000? Assume the MPC has not changed.
An Increase in transfers worth $60,000 will firstly increase consumption by:
$60,000 * 0.75 = 45,000
Now total increase in real GDP = Increase in C * multiplier = 45,000 * 4 = 180,000
Therefore increase in real GDP = $180,000
3) An increase in government transfers or taxes as opposed to an increase in government purchases of goods and services will result in
Solution: a] smaller eventual effect on real GDP
It will be much smaller than the eventual increase in government transfers
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