Question

Suppose the government increases expenditures by ​$10 billion and the marginal propensity to consume is 0.50. By how much will equilibrium GDP​ change? The change in equilibrium GDP​ is: ​$ nothing billion.

Answer 1

$20 billion

Step-by-step explanation:

Data provided in the question:

Increase in government expenditure = $10 billion

Marginal propensity to consume, MPC = 0.50

Now,

Multiplier = 1 ÷ (1 - MPC)

or

Multiplier = 1 ÷ (1 - 0.50)

or

Multiplier = 2

thus,

Change in equilibrium GDP ($ billion)

= Increase in government expenditure × Multiplier

= $10 billion × 2

= $20 billion