Question

If the MPC is 0.71 and taxes decrease by $548, holding all else constant, real GDP will change by according to the μltiplier effect. Please round to 2 decimal places. Be sure to include a negative sign (-) if it is a decrease and do not include a dollar sign ($) when answering.

a) $1710.42
b) $386.62
c) -$774.65
d) $773.79

Answer 1

The change in real GDP, due to a decrease in taxes by $548, is approximately -$1887.60 when considering the multiplier effect.

Step-by-step explanation:

The question is asking for the change in real GDP based on the multiplier effect when taxes decrease by $548, holding all else constant. The multiplier can be calculated using the formula: multiplier = 1 / (1 - MPC). In this case, the MPC is given as 0.71, so the multiplier is approximately 1 / (1 - 0.71) = 3.45. The change in real GDP can be found by multiplying the change in autonomous spending (taxes decrease) by the multiplier: change in real GDP = multiplier * change in autonomous spending = 3.45 * (-548) = -1887.6. Rounding to 2 decimal places, the change in real GDP is approximately -$1887.60.