GDP=330
Government spending increases by 30
Investment increases by 10
Net Exports decreases by 15
MPC=.2
What is the new equilibrium GDP?
To find the new equilibrium GDP, we need to take into account the changes in government spending, investment, and net exports. The equilibrium level of GDP is determined by the aggregate expenditure (AE), which is the sum of consumption (C), investment (I), government spending (G), and net exports (NX). The formula for AE is:
AE = C + I + G + NX
Given the initial GDP (330), and the changes in government spending (30), investment (10), and net exports (-15), we can calculate the new equilibrium GDP using the following steps:
1. Find the change in aggregate expenditure (∆AE):
∆AE = ∆G + ∆I + ∆NX
∆G = 30
∆I = 10
∆NX = -15
∆AE = 30 + 10 - 15
∆AE = 25
2. Calculate the multiplier (k):
The multiplier (k) is the ratio of the change in equilibrium GDP to the change in aggregate expenditure:
k = 1 / (1 - MPC)
Given that MPC (marginal propensity to consume) is 0.2, we can substitute it into the formula:
k = 1 / (1 - 0.2)
k = 1 / 0.8
k = 1.25
3. Determine the change in equilibrium GDP (∆Y):
∆Y = k * ∆AE
∆Y = 1.25 * 25
∆Y = 31.25
4. Calculate the new equilibrium GDP (Y):
Y = initial GDP + ∆Y
Y = 330 + 31.25
Y = 361.25
Therefore, the new equilibrium GDP is 361.25.