Suppose that households spend 60% of each additional dollar in income that they earn. How much...

Suppose that households spend 60% of each additional dollar in income that they earn. How much will Real GDP rise when autonomous spending increases by $250?

Expert Solution

As the household spends 60% of their income the marginal propensity to consume will be 0.6.

The multiplier will be K = 1/1-MPC

= 1/ 1-0.6

= 1/0.4

= 2.5, The multiplier in the economy is 2.5 i.e. any increase in the expenditure result in increase the GDP by 2.5 times.

An increase in the autonomous spending by 250 will increase the real GDP by 250 x 2.5 = $625.

Rahul Sunny answered 2 years ago

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