Posted by jay on .
Suppose that the MPC = 0.8 and that $12 trillion of real GDP is currently being demanded. The government wants to increase real GDP demanded to $13 trillion. By how much would it have to increase government spending to achieve this goal?
Can someone give me the formula for this?
Interestingly, the final answer keeps changing depending on the level of your economics course. If this your first macro-economics then use as simple multiplier. The multiplier is simply 1/MPS, where MPS is the marginal propensity to save = 1-MPC. So in your example, the multiplier = 1/.2 = 5 With a 5 multiplier, how much does govt need to spend to raise GNP by 1-trillion. Take it from here.
Now then, as you advance in econ the simple problem becomes more complicated. Govt cant really just spend more without raising taxes (or printing money). Imposing a tax will greatly reduce the multiplier. But, don't worry about this now.