Question

In: Economics

If the MPC is .9, and government purchases increase by $6,000, real GDP demanded will:

Expert Solution

The answer is that the GDP demanded will increased by $60,000.

The aggregate expenditure would be as or , where C is consumption expenditure, I is investment expenditure and G is government spending. The equilibrium would be where the real GDP demand (Y) is equal to the aggregate expenditure, ie where or or or or . Now, for two different G's, there would be two different Y's as and . Subtracting the two equations would be or or or . Hence, the government spending multiplier is . Hence, for the given information, we have or or . This means that the real gdp demanded would be increased by $60,000.

Rahul Sunny answered 2 years ago

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