Question

Troll island is a small island nation that recently experienced an autonomous change in aggregate expenditures (ae). ae increased by 2 billion, and the marginal propensity to consume on troll island is equal to 0.6. what is the change in troll island\'s real gdp after the increase in ae

Answer 1

The change in Troll’s Island real gdp after the increase in ae is 5 billion

Step-by-step explanation:

In this question, we are asked to calculate the change in Troll’s Island GDP, given that its aggregate expenditure increased by 2 billion and the marginal propensity to consume MPC on Troll Island is 0.6

Firstly, to compute this, we need to calculate the multiplier.

Mathematically,

Multiplier = 1/(1-mpc) or 1/mps

Where mps is marginal propensity to save which is 1-mpc = 1-0.6 = 0.4

Multiplier = 1/0.4 = 2.5

Now, we proceed to calculate the change in GDP

Mathematically, this is equal to multiplier * change in aggregate expenditures = 2.5 * 2 billion = 5 billion

Answer 2

troll island's real gdp after the increase in ae is 5

Step-by-step explanation:

MPC = 0.6

MPS= 1- 0.6

Multiplier = 1/1-MPC

=1/1-0.6

(1/1-0.6)*2

=5