Question

1.     What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? If the MPC instead is 0.67? (answer kn your own words)

Answer 1

Answer.) we know that

MPS = 1 - MPC and

Multiplier = (1/1-MPC)

if MPS = 0 then MPC = 1 and Multiplier is Infinity.

if MPS = 0.4 then MPC = 0.6 and Multiplier is 2.5

if MPS = 0.6 then MPC = 0.4 and Multiplier is 1.67

if MPS = 1 then MPC = 0 and Multiplier is 1.

Now,

If MPC = 1, then multiplier = infinity .

If MPC = 0.9, then multiplier = 10 .

If MPC = 0.67, then multiplier = 3.03 .

If MPC = 0.5, then multiplier = 2 .

If MPC = 0, then multiplier = 1 .

If firms increase their level of investment by $8 billion and the MPC is 0.80 then

Multiplier = 1/(1-0.8) = 5

GDP will increase by = ($8 billion * 5) = $40 billion.

If firms increase their level of investment by $8 billion and the MPC is 0.67 then

Multiplier = 1/(1-0.67) = 3.03

GDP will increase by = ($8 billion * 3.03) = $24.24 billion.