Question

You inherit $1000 from your Mother.

1) What do you do with the money? What do you spend it on? Do you save any of it?

2) Calculate your MPS and MPC. Show your work.

3) Calculate your Multiplier.    Show your work.

4) What effect does your spending have on GDP - how much additional spending is credited?

Answer 1

(1) I will purchase a car worth $750 and save the remaining amount of $250 from the total inheritance of $1000

(2) MPS = change in savings / change in income = 250/1000 = 0.25

MPC = change in consumption / change in income = 750/1000 = 0.75

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

= 1/(1-0.75) = 1/0.25 = 4

(4) change in GDP = change in spending*spending multiplier

Putting values, we get

change in GDP = 750*4 = 3000

Thus, the spending of $750 leads to an increase in GDP by $3000

Additional spending = 3000 - 750 = 2250