Question

A. If the MPC is = to .9, what is the multiplier?               Multiplier = 1/1-.9...

A. If the MPC is = to .9, what is the multiplier?  

            Multiplier = 1/1-.9

            =1/.1

            =10

        B. If the MPC is = to .75, what is the multiplier?

            Multiplier = 1/1-.75

            =1/.25           

            =4

        C. If the MPC is = to .6, what is the multiplier?

            Multiplier = 1/1-.6

            =1/.4

            =2.5

        D. If the MPC is = to .5, what is the multiplier? 20 points

            Multiplier = 1/1-.5

            =1/.5

            =2

7.) Based on the questions shown above:

If the MPC is = to .9, and spending increases by $30 billion, what is the increase in GDP? Show all work.

If the MPC is = to .8, and spending increases by $30 billion, what is the increase in GDP? Show all work. 5 points

If the MPC is = to .75, and spending increases by $30 billion, what is the increase in GDP? Show all work. 5 points

If the MPC is = to .5, and spending increases by $30 billion, what is the increase in GDP? Show all work. 5 points

Notice that in questions 7, 8, & 9 the MPC decreases, the increase in spending stays the same and the increase in GDP decreases. Why does that occur? 5 points

If the MPC is = .9 and spending decreases by $100 billion, what happens to GDP? Show all work. 5 points.

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Homework Answers

Answer #1

a) Multiplier will result in the increase or decrease in the total output by the multiplier number. If the government is increasing the total output by 30 billion the GDP will increase by 30 x 10 (with the MPC being 0.9 the multiplier is 10) $300 billion.

b) with the MPC being 0.8 then multiplier will be 5 and the GDP increase will be 30 x 5 = $150.

c) If MPC is 0.75 then increase in the GDP will be 30 x 4 = $120 billion.

d) If MPC is 0.5 then increase in the GDP will be 30 x 2 = $60 billion.

Even If the spending remains the same but as the Multiplier decreases the total increase in the GDP will decrease with the multiplier value in the economy.

If the spending decrease by 0.9 the multiplier will be 10 and the total decrease in the GDP will be $100 x 10 = $1000 billion.

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