Question

The Bureau of Economic Analysis reported that, in real terms, overall consumer spending increased by $35.4 billion during October 2010.

a. If the marginal propensity to consume is 0.52, by how much will real GDP change in response?
b. If there are no other changes to autonomous spending other than the increase in consumer spending in part a, and unplanned inventory investment, decreased by $50 billion, what is the change in real GDP?
c. GDP at the end of September 2010 was $13,139.5 billion. If GDP were to increase by the amount calculated in part b, what would be the percent increase in GDP?

Answer 1

Answer:

A.$73.75 billions

B. $50 billion

C. 0.18%

Explanation:

a. The real GDP change in response by

(1/(1 −MPC) ×$35.4 billion = (1/(1 −0.52) ×$35.4 billion =$73.75 billion.

b. If in addition to the consumer spending change in part a, unplanned inventory invest-ment decreases by $50 billion, the resulting change in real GDP is

$73.75 billion - $50 billion = $23.75 billion.

c.The percent increase in GDP is

($23.75 billion/$13,139.5 billion) ×100

=0.18%

Answer 2

Answer:

a. Now we have a conditional tendency to consume, 1/MPS= 1/1-MPC= 1/1-0.52= 2.083 can be determined using this multiplier.

Now therefore, the total increase is 35.4 * 2.083 = approximately 73.7 Billion.

b. Here we can see two opposite forces GDP one reduces it and overall impact is + 35.4-50 = -14.6

Keeping that factor in mind, we see that the overall decrease is  Approximately 30.4118 Billion.

c. Raise Ratio is 30.4118 / 13.139.5 = 0.231 per cent