Question

increases government purchases of goods and services by $50 million. Also assume the absence of taxes, international trade, and changes in the aggregate price level. a. What is the value of the multiplier? b. By how much will real GDP change as a result of the increase in government purchases? c. What would happen to the size of the effect on real GDP if the MPC fell? Explain. d. If we relax the assumption of no taxes, automatic changes in tax revenue as income changes will have what

Answer 1

Incomplete question - missing certain parameters

A Certain parameter is missing. The Marginal Propensity to Consume (MPC) is missing from the question. But in any case, you can use the formulae below to arrive at the answers.

a. Value of Multiplier = 1/(1-MPC)

b. Increase in GDP = 50 * (Value of Multiplier)

c. If MPC fell, increase in GDP will be reduced. A fall in MPC will increase the denominator and hence reduce multiplier.

d. Decrease