A report says that consumer spending increased by $447 in 2019 If the marginal propensity to...

A report says that consumer spending increased by $447 in 2019

If the marginal propensity to consume is 0.35, by how much will real GDP change in response? (Answer is 687.7, how did they get that?)

If there are no more changes to consumption other than that in part 1 above, and unplanned inventory investment I(unplanned) lowered by $108, what is the change in real GDP? (Answer is 521.5, how did they get that?)

Real GDP at the end of 2018 was 1.8 x 10^ 4. If GDP were to increase or decrease by the amount in part 2, what would be the percentage change in real GDP? (Answer is 2.897, how did they get that?)

Expert Solution

Report states that increase in consumer spending is 447, mpc= 0.35

So recall what the multiplier is. A multiplier by definition shows the change in output due to change in aggregate spending (C,I,G,NX) It's formula is given by 1/1-c.

So the multiplier is 1/1.0.35 = 1.538

Also multiplier from the definition is change in Y/change in C.

So 1.538 = change in Y/change in C

So change in Y = 1.538×447 = 687.69 (687.7)

Again here we use the multiplier definition to find change in Y due to a change in I. Here output falls as I falls.

So change (fall) in Y = 1.538×108 = 166.104.

So this fall in I will reduce the increase is Y caused in the last part. Hence the net change in real GDP = 687.7-166.104 = 521.5 which is the net change in real GDP.

End of year GDP = 18000. So now we increase the amount of GDP by the net increase we found in part 2. We have a change of GDP to 18000+521.5 = 18521.5 is new real GDP.

Percentage change in GDP = change in GDP/initial GDP ×100

= 521.5/18000 × 100 = 2.897%

Rahul Sunny answered 1 year ago

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