Question

Investment spending rises by \$200. Make a table showing the effect on I, C, and GDP for each of 3 rounds and the total effect after all possible rounds are completed if the MPC=0.6 Use the table I present in my video lectures \#1 and \#2 as your guide for format.

1) Investment spending rises by $200. Make C, → table showing the effect on I, the total for each of 3 rounds p are completed if the MPC=0.6.

Answer 1

The question involves calculating the effect of a $200 increase in investment on consumption and GDP across multiple rounds with an MPC of 0.6, demonstrating the multiplier effect in a Keynesian framework.

Step-by-step explanation:

The student asks about the impact of an increase in investment spending on consumption (C), investment (I), and gross domestic product (GDP) given a marginal propensity to consume (MPC) of 0.6. We use the multiplier effect to understand how an initial increase in investment affects the economy in several rounds. Essentially, the initial increase in investment spending leads to an increase in consumption, which further raises GDP. This process continues with diminishing impact through multiple rounds.

Table Format:

Round
Investment (I)
Consumption (C)
Total


1
$200
$200 x MPC
$200 + ($200 x MPC)


2
$0 (no new investment)
Previous C x MPC
Previous Total + (Previous C x MPC)


3
$0 (no new investment)
Previous C x MPC
Previous Total + (Previous C x MPC)

After completing these rounds, we would also calculate the total cumulative effect after all rounds, demonstrating the concept of the expenditure multiplier.