Question

Troll Island is a small island nation that recently experienced an autonomous change in aggregate expenditures (AE). AE increased by 5 billion, and the marginal propensity to consume on Troll Island is equal to 0.73 . What is the change in Troll Island's real GDP after the increase in AE

Answer 1

18.52

Step-by-step explanation:

The computation of the change in Troll island real GDO after rise in AE is shown below:

Given that

Rise in accumulated depreciation by 5 billion

Marginal propensity to consume is 0.73

Based on the above information,

We know that

MPS = 1 - MPC

= 1 - 0.73

And, the multiplier is

= 1 ÷ (1 - MPC)

= 1 ÷ (1 - 0.73)

= 1 ÷ 0.27

= 3.70

Now the change is

= 5 billion × 3.70

= 18.52