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a) Suppose the marginal propensity to consume is 0.7, what will happen to real GDP if...

a) Suppose the marginal propensity to consume is 0.7, what will happen to real GDP if planned investment increases by $300 billion?b) Suppose the marginal propensity to save is .4, what how much will taxes have to change if real GDP decreases by $450 billion?

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Answer #1

(a)We have used the investment multiplier in the formula from which we get that Real GDP will increase by $1,000 billion with increase in planned investment by $300 billion.

(b) we have used the tax multiplier from which we get that a $450 billion decrease in real GDP is caused by increase in taxes by $300 billion.

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