Answer:
The correct answer is: $1 trillion; $4 trillion.
Step-by-step explanation:
The marginal propensity to consume is 0.8.
Government spending decreases by $1 trillion.
The real GDP will initially decline by the amount of decline in government spending.
So the decline in the real GDP will initially be $1 trillion.
The overall decrease in the real GDP will be by the size of the spending multiplier.
Total decrease in real GDP
=
=
=
= $5 trillion
Out of this $5 trillion decrease, $1 was initially decreased.
So decline in real GDP due to reduced consumption will be
= $5 trillion - $1 trillion
= $4 trillion