215k views
3 votes
now suppose that the change in government purchases of goods and services was $20 million. what value of the spending multiplier would result in an increase in real gdp of $200 million?

User Sneas
by
7.1k points

1 Answer

7 votes
The value of the spending multiplier that would result in an increase in real GDP of $200 million if the change in government purchases of goods and services was $20 million is 10. How did I know? Read the following:The Spending Multiplier is the ratio of the total amount of extra income generated by any initial increase in spending to the increase in spending itself. The spending multiplier is calculated using the following formula:Spending Multiplier = 1 / (1 - MPC), where MPC stands for Marginal Propensity to Consume.In other words, the spending multiplier is inversely related to the Marginal Propensity to Consume, with the MPC being a number between 0 and 1. When the MPC is greater, the spending multiplier is lower, implying that less new money is spent in the economy.Given that the change in government purchases of goods and services is $20 million, and the increase in real GDP is $200 million, we can use the spending multiplier formula to determine the spending multiplier value that would cause such an increase in GDP, as follows:Spending Multiplier = Increase in Real GDP / Change in Government PurchasesSpending Multiplier = $200 million / $20 million = 10, which implies that for every $1 of government spending, $10 of real GDP increases, resulting in an increase in GDP of $200 million when government spending is increased by $20 million.
User TheMightyLlama
by
7.3k points