GDP=400
Investment decreases by 5
Government spending increases by 25
Consumption increases by 5
MPS=.2
What is the new equilibrium GDP?
To find the new equilibrium GDP, we need to consider the changes in investment, government spending, consumption, and the marginal propensity to consume (MPS).
First, let's calculate the change in investment. If investment decreases by 5, we subtract 5 from the initial GDP:
GDP = 400 - 5 = 395
Next, let's calculate the change in government spending. If government spending increases by 25, we add 25 to the GDP:
GDP = 395 + 25 = 420
Now, let's calculate the change in consumption. If consumption increases by 5, we multiply that change by the marginal propensity to consume (MPS) to determine the impact on GDP. MPS represents the proportion of each additional income that is used for consumption.
Change in consumption = 5 x MPS
If MPS = 0.2, the change in consumption would be:
Change in consumption = 5 x 0.2 = 1
We now add the change in consumption to the current GDP:
GDP = 420 + 1 = 421
Therefore, the new equilibrium GDP is 421.