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Assume the MPC is .63. If government increases spending by $500 Million in the economy to...

Assume the MPC is .63. If government increases spending by $500 Million in the economy to stimulate economy performance, what is the total change in GDP?

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Answer #1

Solution:-

Change in GDP = change in spending x multiplier

Multiplier – 1/MPS

MPC + MPS = 1

MPC + MPS = 1

0.63 + MPC = 1

MPS = 0.37

Multiplier = 1/MPS = 1/1-MPC = 1/0.37 = 2.7

Change in GDP = change in spending x multiplier

                           = $500 * 2.7

                           = $1350

The total change in GDP is $1350.

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