If mpc = 0.75, a decrease from 700 to 660 billion n government spending, will decrease GDP byGroup of answer choices40 billion10 billion160 billion20 billion
Question
If mpc = 0.75, a decrease from 700 to 660 billion n government spending, will decrease GDP byGroup of answer choices40 billion10 billion160 billion20 billion
Solution
The question is asking about the impact of a decrease in government spending on the Gross Domestic Product (GDP) given a Marginal Propensity to Consume (MPC) of 0.75.
The Marginal Propensity to Consume is the increase in consumer spending due to an increase in income. In this case, a decrease in government spending is effectively a decrease in national income.
The multiplier effect can be calculated as 1 / (1 - MPC). In this case, the multiplier is 1 / (1 - 0.75) = 4.
The change in GDP is the multiplier times the change in spending. The change in spending is 700 billion - 660 billion = 40 billion.
Therefore, the change in GDP is 4 * 40 billion = 160 billion.
So, a decrease from 700 to 660 billion in government spending will decrease GDP by 160 billion.
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