If the marginal propensity to consume is 0.8 and government purchases of goods and services decrease by $30 billion, real GDP will decrease by $24 billion.

Question

Quizplus · Accepted Answer

The formula to calculate the change in real GDP due to a change in government purchases is:

Change in Real GDP = - MPC x Change in Government Purchases

In this case, the MPC is 0.8 and the change in government purchases is -$30 billion. Substituting these values into the formula:

Change in Real GDP = -0.8 x (-$30 billion) = $24 billion

However, the question asks for the decrease in real GDP, not the absolute change. Since government purchases are decreasing, real GDP must also be decreasing. Therefore, the answer should be:

Answer: A

If the Marginal Propensity to Consume Is 0