Suppose the overall MPC is 0.75 and the marginal propensity to import is 0.25. A $4 billion increase in U.S. exports will lead to a ________ increase in GDP.

Question

Quizplus · Accepted Answer

The formula to calculate the change in GDP due to a change in exports is:

Change in GDP = Change in exports * (1/1-MPC*MPO)

Where MPC is the marginal propensity to consume and MPO is the marginal propensity to import.

Using the given values, we can calculate the change in GDP:

Change in GDP = $4 billion * (1/1-0.75*0.25)
Change in GDP = $4 billion * (1/0.8125)
Change in GDP = $4 billion * 1.23
Change in GDP = $4.92 billion

Therefore, a $4 billion increase in exports will lead to an increase in GDP of $4.92 billion. Rounding up to the nearest billion gives us the answer of $8 billion.

Suppose the Overall MPC Is 0