Question

Troll Island is a small island nation that recently experienced an autonomous change in aggregate expenditures (AE). AE increased by 4 billion, and the marginal propensity to consume on Troll Island is equal to 0.7. What is the change in Troll Island's real GDP after the increase in AE?

Answer 1

Answer:

Change in real GDP = $13,333,332,000

Explanation:

MPC = 0.7

Change in real GDP = Change in autonomous spending * Autonomous spending multiplier

Change in real GDP = $4 billion * 1 / (1 - MPC)

Change in real GDP = $4 billion * 1 / 1 - 0.7

Change in real GDP = $4 billion * 3.33333

Change in real GDP = $13,333,332,000

Thus, the real GDP will rise by $13.33 billion