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Question
Statistics
Posted 10 months ago

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\$ 10 billion, what will happen to real gross domestic product (GDP)?

Choose 1 answer:
(A) Real GDP will increase by less than $9\$ 9 billion
(B) Real GDP will increase by more than $10\$ 10 billion
(C) Real GDP will increase by exactly $10\$ 10 billion
(D) Real GDP will not change
(E) Real GDP will increase by exactly $9\$ 9 billion
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
To determine the total change in real GDP, we use the expenditure multiplier formula: Multiplier=11−MPC \text{Multiplier} = \frac{1}{1 - \text{MPC}}
step 2
Substitute the given MPC value into the multiplier formula: Multiplier=11−0.9=10 \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: ΔGDP=Multiplier×Autonomous Increase=10×10 billion=100 billion \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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