Question

Income and Expenditure – End of Chapter Problems 5. The Bureau of Economic Analysis reported that, in real terms, overall consumer spending increased by $345.8 billion in 2015. a. If the marginal propensity to consume is 0.50, by how much will real GDP change in response? Enter your answer in billions of dollars. Change in GDP: $ billion b. If there are no changes in autonomous spending other than the increase in consumer spending described in part a, and unplanned inventory investment, ????unp????anned , decreases by $100 billion, what is the change in real GDP? Enter your answer in billions of dollars. Change in GDP: $ billion c. GDP at the end of 2014 was $15,982.3 billion. If GDP were to increase by the amount calculated in part b, what would be the percentage increase in GDP? Round your answer to the nearest hundredth of a percent.

Answer 1

Please see solution below

Step-by-step explanation:

a. Details from the above question;

MPC = 0.50

Change in consumption spending = $345.8 billion

Recall that;

Marginal propensity to consume = 1 / 1 - MPC

= 1 / 1 - 0.5

= 1 / 0.5

= 2

Hence, change in GDP = change in consumption spending × 2

= $345.8 × 2

= $691.6 billion

Therefore,

Change in GDP = $691.6 billion

b. Recall that; change in investment = -$100 billion

Marginal propensity to consume [Change in real GDP / Change in investment = 1 / 1 - MPC

=1 / 1 - 0.5

= 1 / 0.5

= 2

Change in GDP = Change in investment × 2

= (-$100) × 2

= -$200 billion

Hence, total change in GDP

= $691.6 - $200

= $491.6 billion

c. Percentage change in real GDP

= (change in real GDP / GDP at year end of 2014) × 100

= (491.6 / 15,982.3) × 100

= 3.08%