Question

What is the eventual effect on real GDP if the government increases its purchases of goods and services by $80,000? Assume the marginal propensity to consume (MPC) is 0.75. $ What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $80,000? Assume the MPC has not changed. $ An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real GDP. a smaller eventual effect on real GDP. a larger eventual effect on real GDP. no change to real GDP.

Answer 1

Answer:

Given that,

(a) Government purchases increases by $80,000

Marginal propensity to consume (MPC) = 0.75

$Real GDP =\frac{1}{1-MPC}\times Government\ purchases$

$Real GDP =\frac{1}{1-0.75}\times 80,000$

                        = 4 × 80,000

                        = $320,000

Therefore, Real GDP increases by $320,000.

(b) If transfers increases by $80,000

MPC = 0.75 (MPC doesn't change)

$Real GDP =\frac{MPC}{1-MPC}\times Government\ transfers$

$Real GDP =\frac{0.75}{1-0.75}\times 80,000$

                        = 3 × 80,000

                        = $240,000

Therefore, total change in real GDP is $240,000. So, real GDP increases by $240,000.

(c) It is totally clear from the above calculations that an increase in the government transfers or taxes, as opposed to an increase in government purchases will result in a smaller eventual effect on real GDP.

Change in real GDP occur due to increase in government transfers = $240,000

Change in real GDP occur due to increase in government purchases = $320,000

Answer 2

The eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $80,000 is c. a smaller eventual effect on real GDP

Explanation:

What is the eventual effect on real GDP if the government increase its purchases of goods and services by $50,000? Assume the marginal propensity is to consume is 0.75

The change in real gross domestic product  is

$=\frac{1}{1-MPC} *  change in the government purchase\\=\frac{1}{1-0.75} * 50,000\\=4* 50.000\\= 200.000$

Therefore the is increasing of the real gross domestic product by $200.000 with an increase of $50.000 in the purchase of the government.

What is the eventual effect on real GDP if the government instead of changing its spending, increases transfers by $50,000? Assume the MPC has not changed.

$=\frac{1}{1-MPC} *  change in transfers\\=\frac{0.75}{1-0.75} * 50,000\\=3* 50.000\\= 150.000$

Therefore the is increasing of the real gross domestic product by $150.000 with an increase of $50.000 in the purchase of the government.

Therefore an increase in government transfers or taxes as opposed to an increase in government purchases of goods and services will result in:

• a. an identical eventual effect on real GDP
• b. a larger eventual effect on GDP
• c. a smaller eventual effect on real GDP
• d. no change to real GDP

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