Question

Troll Island is a small island nation that recently experienced an autonomous change in aggregate expenditures (AE). AE increased by 7 billion, and the marginal propensity to consume on Troll Island is equal to 0.85What is the change in Troll Island's real GDP after the increase in AE?

Answer 1

Change in GDP = $46.62

Step-by-step explanation:

Multiplier can be used to analyse the multiple times change in GDP due to change in autonomous aggregate expenditure.

Change in income (GDP) = M x Change in Autonomous variable;

where M = Multiplier = 1 / (1 - MPC)

So, Change in Income = [ 1 / (1 - 0.85) ] x 7

( 1 / 0.15 ) x 7

6.66 x 7

= 46.62 [Change in Income (GDP)]