The marginal propensity to consume is 0.7. How would an initial spending of $1200 affect the...

Question

Question

The marginal propensity to consume is 0.7.

How would an initial spending of $1200 affect the GDP?

Answer 1

Answer #1

Answer

The effect will be higher by the multiplier times

Multiplier =1/(1-MPC)

=1/(1-0.7).

=1/0.3

=1/(3/10)

=10/3

change in GDP=change in spending *multiplier

=1200*(10/3)

=$4000

the GDP will increase a maximum of $4000

Answer 2

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