Question

If the marginal propensity to consume is 0.81 and there is an initial increase in Government Spending of $83 Billion, how much will the recipients of that $83 Billion spend on Investment?

a- 67.23

b-0.81 billion

c- 81 billion

d- 15.77

e- 436.84

f- none

If the Keynesian Multiplier is 5.3 and there is an initial increase in Government Spending of $56 Billion, Real GDP in the economy will increase by _____.

a- 45.43 billion

b- 0

c- 5.3 billion

d-296.8 billion

e- 10.57 billion

Answer 1

Question 1

MPC = 0.81

Increase in government spending = $83 billion

Calculate the increase in investment -

Increase in investment = MPC * Increase in government spending

Increase in investment = 0.81 * $83 billion

Increase in investment = $67.23 billion

The recipients will spend $67.23 billion on investment.

Hence, the correct answer is the option (a).

Question 2

Multiplier = 5.3

Initial increase in government spending = $56 billion

Calculate the increase in real GDP -

Increase in real GDP = Increase in government spending * Multiplier

Increase in real GDP = $56 billion * 5.3 = $296.8 billion

Hence, the correct answer is the option (d).