If the MPC in the economy is 0.7 and aggregate expenditures fall by $10 billion, then real GDP will fall by $17 billion.

Question

Quizplus · Accepted Answer

The formula to calculate the change in real GDP due to a change in aggregate expenditures is:

Change in Real GDP = Multiplier x Change in Aggregate Expenditures

The multiplier can be calculated using the following formula:

Multiplier = 1 / (1 - MPC)

In this case, MPC = 0.7, so:

Multiplier = 1 / (1 - 0.7) = 3.33

If aggregate expenditures fall by $10 billion, the change in aggregate expenditures is -10. Therefore:

Change in Real GDP = 3.33 x (-10) = -$33.3 billion

Therefore, the statement is false as real GDP will fall by $33.3 billion, not $17 billion.

If the MPC in the Economy Is 0