*MPC = 3/4
*change in Taxes(T) = $5 Billion
*change in Government Purchases= - $12 Billion
*Find the change in equilibrium Real GDP?
My answer that I get is a $63 Billion fall in Real GDP. Is this correct?
I too get a fall of $63B
Thanks for the help.
To find the change in equilibrium Real GDP, we can use the formula for the multiplier effect:
Multiplier = 1 / (1 - MPC)
where MPC represents the marginal propensity to consume.
Given that MPC is 3/4, we can substitute it into the formula:
Multiplier = 1 / (1 - 3/4) = 1 / (1/4) = 4
Now, let's consider the changes in taxes (T) and government purchases (G) given:
Change in Taxes (T) = $5 billion (negative value indicates a decrease in taxes)
Change in Government Purchases (G) = -$12 billion (negative value indicates a decrease in government purchases)
To find the change in equilibrium Real GDP, we can use the formula:
Change in equilibrium Real GDP = Multiplier * (Change in Taxes + Change in Government Purchases)
Substituting the given values:
Change in equilibrium Real GDP = 4 * ($5 billion + (-$12 billion))
= 4 * (-$7 billion)
= -$28 billion
Therefore, the correct answer is a fall of $28 billion in Real GDP, not $63 billion. Apologies for the confusion.