Scenario 10.1
Imagine an economy that does not have international trade and is originally in equilibrium. Then the government increases the level of spending by $350 million because it received a gift from abroad. In this economy, only 65 cents of every dollar is spent, and the rest is saved.
-Refer to Scenario 10.1. The new equilibrium level of GDP for the economy will be:

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume (0.65 in this case). The multiplier is 1/(1-0.65) = 2.857. The increase in GDP is the multiplier times the increase in spending: 2.857 * $350 million = $1 billion.

Scenario 10.1 Imagine an Economy That Does Not Have International Trade and Trade