Question

7 . Study Questions and Problems #5 Suppose the value of the MPC in an economy is 0.5 The value of the MPS in this economy is and the value of the spending multiplier in this economy is Now, suppose the value of the MPC in an economy is 0.8 The value of the MPS in this economy is , and the value of the spending multiplier in this economy is If the value of the MPC increases, the spending multiplier will Suppose the equilibrium real GDP is $100 billion, and the value of the MPC is 0.5. If businesses increase their level of investment by $10 billion, the new equilibrium level of output will by S billion to a new level of s billion.

Answer 1

i)

Given MPC=0.50

MPS=1-MPC=1-0.50=0.50

Spending multiplier=1/MPS=1/0.50=2

ii)

Given MPC=0.80

MPS=1-MPC=1-0.80=0.20

Spending multiplier=1/MPS=1/0.20=5

iii)

We can observe that if MPC increases, spending multiplier will increase.

iv)

Given MPC=0.50

MPS=1-MPC=1-0.50=0.50

Spending multiplier=1/MPS=1/0.50=2

Change in investment=$10 billion

Increase in output=change in investment*Spending multiplier=10*2=$20 billion

Equilibrium GDP will increase by $20 billion to a new level of 100+20=$120 billion