If the marginal propensity to save is 0.2 and the government decreases its purchases by $20 billion, then real GDP will
Question
If the marginal propensity to save is 0.2 and the government decreases its purchases by $20 billion, then real GDP will
Solution
The question seems to be incomplete. However, I can provide a general answer based on the information given.
The marginal propensity to save (MPS) is the increase in household savings due to an increase in national income. If the MPS is 0.2, this means that for every additional dollar of income, households will save $0.2 and spend the rest.
If the government decreases its purchases by $20 billion, this means there is a decrease in government spending, which is a component of aggregate demand. This decrease in government spending will lead to a decrease in real GDP.
However, to calculate the exact change in real GDP, we would need to know the multiplier. The multiplier can be calculated as 1/(1-MPS). In this case, the multiplier would be 1/(1-0.2) = 1.25.
So, if government spending decreases by 20 billion * 1.25 = $25 billion.
Please note that this is a simplified explanation and the actual impact on real GDP could be influenced by many other factors.
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