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The marginal propensity to consume is equal to 0.80. An increase in household wealth causes...

Question:

The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 billion. By how much will equilibrium real GDP increase at the current price level, other things equal?

Multiplier Effect:

When there is an increase in the autonomous component of real GDP, the real GDP will increase by the greater amount than the increase in the autonomous component. The greater change in GDP comes from the multiplier effect. The value of the multiplier is one divided by the one minus marginal propensity to consume.

{eq}\Delta GDP = \frac{\Delta A}{1 - MPC} {/eq}

Here A is an autonomous component of GDP.

Answer and Explanation: 1

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The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 billion.

{eq}\Delta...

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The Multiplier Effect and the Simple Spending Multiplier: Definition and Examples

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Chapter 5 / Lesson 9
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The multiplier effect is when the money spent multiplies as it filters through the economy. Explore the multiplier effect, the marginal propensity to consume, the marginal propensity to save, and find out how to use the simple spending multiplier.


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