Question

if aggregate expenditures rise by $200 billion and real gdp consequently rises by $500 billion, then the mpc in the economy must be 0.4. true or false

Answer 1

The statement is false because a rise in expenditures of $200 billion leading to a $500 billion increase in GDP implies a Keynesian multiplier of 2.5, which corresponds to an MPC of 0.6, not 0.4.

Step-by-step explanation:

The statement that if aggregate expenditures rise by $200 billion and real GDP consequently rises by $500 billion, then the marginal propensity to consume (MPC) in the economy must be 0.4 is false. To determine the correctness of this statement, one must understand the concept of the multiplier effect in Keynesian economics. The formula for the multiplier is 1/(1-MPC), and the real change in GDP is the product of the multiplier and the change in aggregate expenditures.

Given a $200 billion increase in expenditures leading to a $500 billion increase in GDP, the implied multiplier is $500 billion / $200 billion = 2.5. Using the multiplier formula, we rearrange to find MPC = 1 - (1/multiplier), which calculates to MPC = 1 - (1/2.5) = 0.6, not 0.4.