Question

if the marginal propensity to consume is 0.8 , an increase of $20,000 in government spending will change the real gross domestic product by a maximum of responses $16,000 $16,000 $20,000 $20,000 $80,000 $80,000 $100,000 $100,000 $120,000

Answer 1

The increase in government spending of $20,000 with a marginal propensity to consume of 0.8 will change the real GDP by a maximum of $100,000.

Step-by-step explanation:

The marginal propensity to consume (MPC) refers to the proportion of an increase in income that is spent on consumption. In this case, the MPC is 0.8, meaning that for every extra dollar of income, 80% of it will be spent.

When the government increases spending by $20,000, we can calculate the change in real GDP using the multiplier effect. The multiplier is the inverse of the marginal propensity to save (MPS), which is 0.2 (since MPS = 1 - MPC). The formula for the multiplier is 1 / MPS. In this case, the multiplier is 1 / 0.2 = 5.

Therefore, the maximum change in real GDP can be calculated as the product of the increase in government spending and the multiplier: $20,000 * 5 = $100,000. Thus, the correct answer is $100,000.