Question

Troll Island is a small island nation that recently experienced an autonomous change in aggregate expenditures (AE). AE increased by 5 billion, and the marginal propensity to consume on Troll Island is equal to 0.73 . What is the change in Troll Island's real GDP after the increase in AE? Enter your answer in billions of dollars, rounded to one place after the decimal. For example, an answer of $2,500,000 should be entered as 2.5.

Answer 1

First we need to calculate the multiplier effect that any increase or decrease on AE will have on the real GDP. The formula for calculating the multiplier is

1/(1-MPC)= 1/(1/.73)= 1/0.27 = 3.7

The multiplier is 3.7, by multiplying the increase in AE by the multiplier we will get the change or increase in Real GDP

Change in Real GDP= 3.7* 5 billion

= 18.5 billion dollars

= 18.5

Step-by-step explanation: