Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form...

Question:

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the expenditure multiplier? a.1, b.2 c.2.8 d.5

Gross Domestic Product

Gross Domestic Product is the total amount and value generated by evaluating all the economic activities. It can be from trading, taxes, production, agriculture, manufacturing and more. The gross domestic product is evaluated to analyze the total worth of the country.

Answer and Explanation:

The correct answer is 2.8

Explanation:

Given -

{eq}\begin{align*} {\rm{Gross}}\;{\rm{Domestic}}\;{\rm{Product}}\left( {{\rm{GDP}}} \right) = \$ 200\;{\rm{billion}}\\ {\rm{MarginalPropensity}}\;{\rm{to}}\;{\rm{Consume}}\left( {{\rm{MPC}}} \right) = 0.8\\ {\rm{Tax}} = 20\% \end{align*} {/eq}

{eq}\begin{align*} {\rm{Expenditure}}\;{\rm{Multiplier}} &= \dfrac{1}{{1 - \left( {{\rm{MPC}}\left( {1 - {\rm{Tax}}} \right)} \right)}}\\ &= \dfrac{1}{{1 - \left( {0.8\left( {1 - 0.2} \right)} \right)}}\\ &= \dfrac{1}{{0.36}}\\ &= 2.7777\\ &= 2.8 \end{align*} {/eq}


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
62K

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