QQuestionEconomics
QuestionEconomics
If the marginal propensity to consume (MPC) is 0.8, the government purchases multiplier will be ______.
This means that a 1increaseingovernmentpurchaseswillleadtoa _____ increase in real GDP.
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Answer
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Step 1:I'll solve this step by step using the government purchases multiplier formula:
Step 2:: Recall the Government Purchases Multiplier Formula
\frac{1}{1 - MPC}
The government purchases multiplier is calculated as:
Step 3:: Identify the Marginal Propensity to Consume (MPC)
Given: MPC = 0.8
Step 4:: Calculate the Multiplier
= 5
= \frac{1}{0.2}
Step 5:: Interpret the Multiplier
This means that a $1 increase in government purchases will lead to a $5 increase in real GDP.
Final Answer
- The government purchases multiplier is 5 - A $1 increase in government purchases will lead to a $5 increase in real GDP Key Insights: - The multiplier works because each round of spending creates additional economic activity - Higher MPC leads to a larger multiplier effect - In this case, 80% of each additional dollar is spent, creating a multiplier of 5
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