Question

What is the eventual effect on real GDP if the government increases its purchases of goods and services by $60,000

Answer 1

Answer: $240,000

Step-by-step explanation:

When given the Marginal Propensity to Consume (MPC), it is possible to calculate the multiplier which will then show how much the Economy will grow by given a change in government expenditure. This is because MPC measures how much of income is spent when income increase.

Multiplier =
`(1)/(1-MPC)`

=
`(1)/(1-0.75)`

= 4

Effect on Real GDP = Government Spending * Multiplier

= 60,000 * 4

= $240,000