Question

If the marginal propensity to consume is 0.87 what would the impact on GDP of an increase of government spending of $275,000,000.00. What is the Net stimulus?

Answer 1

An increase in purchase increases the real GDP in the economy by larger amount of the initial increase. The increase in income is the multipliers times of the initial increase in purchase. The multiplier is given by;

Assuming MPC=0.87,

The change in government purchase is $275 million. then the resulting change in GDP is

GDP increases by $2115.39 million

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The fiscal stimulus is the amount the government increase their purchanse with to stimulate the economy. This is the change in government spending or taxes that help to boost the economy. In this case the stimulus is $275 million.