If the marginal propensity to save equals 0.25 calculate the change in government spending that could eliminate the gap. $----.
To calculate the change in government spending that could eliminate the gap, we need to use the formula for the government spending multiplier.
Government spending multiplier (GSM) = 1 / (1 - MPC)
Given that the marginal propensity to save (MPS) equals 0.25, we can calculate the marginal propensity to consume (MPC) by subtracting MPS from 1.
MPC = 1 - MPS
MPC = 1 - 0.25
MPC = 0.75
Now we can calculate the government spending multiplier.
GSM = 1 / (1 - 0.75)
GSM = 1 / 0.25
GSM = 4
The government spending multiplier tells us that for every dollar increase in government spending, the total output will increase by 4 dollars.
To calculate the change in government spending that could eliminate the gap, we divide the desired change in output by the government spending multiplier.
Change in government spending = Desired change in output / GSM
Since we are given the desired change in output in dollars, we can substitute it into the formula.
Change in government spending = $---- / 4
Please provide the desired change in output in order to accurately calculate the change in government spending that could eliminate the gap.
Is change in ouput is change in real GDP?
Yes, the change in output refers to the change in Real GDP. It represents the increase or decrease in the total value of goods and services produced in an economy over a specific period of time.
real GDP increase from 22 to 23trillion.
Given that the Real GDP increases from $22 trillion to $23 trillion, we can calculate the change in output.
Change in output = New Real GDP - Initial Real GDP
Change in output = $23 trillion - $22 trillion
Change in output = $1 trillion
Now we can calculate the change in government spending that could eliminate this gap using the government spending multiplier.
Change in government spending = Change in output / GSM
Change in government spending = $1 trillion / 4
Change in government spending = $250 billion
Therefore, a change in government spending of $250 billion could potentially eliminate the gap between the initial Real GDP of $22 trillion and the desired Real GDP of $23 trillion.