ÃÂ An economy has a marginal propensity to consume of 0.5, and Y*, incomeÃ¢â¬â expenditure equilibrium GDP, equals $500 billion. Given an autonomous increase in planned investment of $10 billion, show the rounds of increased spending that take place by completing the accompanying table. The first and second rows are filled in for you. In the first row, the increase of planned investment spending of $10 billion raises real GDP and YD by $10 billion, leading to an increase in consumer spending of $5 billion (MPC Ãâ change in disposable income) in row 2, raising real GDP and YD by a further $5 billion.
a. What is the total change in real GDP after the 10 rounds? What is the value of the multiplier? What would you expect the total change in Y* to be based on the multiplier formula? How do your answers to the first and third questions compare?
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b. Redo the table starting from round 2, assuming the marginal propensity to consume is 0.75. What is the total change in real GDP after 10 rounds? What is the value of the multiplier? As the marginal propensity to consume increases, what happens to the value of the multiplier?