Question

Statistics

Posted 5 months ago

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The nation of Johnsrudia has a marginal propensity to consume (MPC) of 0.9 .
If there is an autonomous increase in new home construction of $\$ 10$ billion, what will happen to real gross domestic product (GDP)?
Choose 1 answer:
(A) Real GDP will increase by less than $\$ 9$ billion
(B) Real GDP will increase by more than $\$ 10$ billion
(C) Real GDP will increase by exactly $\$ 10$ billion
(D) Real GDP will not change
(E) Real GDP will increase by exactly $\$ 9$ billion
```

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Answer from Sia

Posted 5 months ago

Solution by Steps

step 1

To determine the total change in real GDP, we use the expenditure multiplier formula: $\text{Multiplier} = \frac{1}{1 - \text{MPC}}$

step 2

Substitute the given MPC value into the multiplier formula: $\text{Multiplier} = \frac{1}{1 - 0.9} = 10$

step 3

Calculate the change in real GDP by multiplying the autonomous increase in investment by the multiplier: $\Delta \text{GDP} = \text{Multiplier} \times \text{Autonomous Increase} = 10 \times 10 \text{ billion} = 100 \text{ billion}$

Answer

The real GDP will increase by $100 billion, which is more than the autonomous increase of $10 billion.

B

Key Concept

Expenditure Multiplier

Explanation

The expenditure multiplier quantifies the effect of an autonomous change in spending on the overall economy, amplifying the initial change.

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