given that the mps in an economy is equal to 0.20, the multiplier is equal to 5.00. (round your answer to…

given that the mps in an economy is equal to 0.20, the multiplier is equal to 5.00. (round your answer to two decimal places) now assume that autonomous real consumption spending is $1 trillion. there is no other autonomous spending presently taking place in the economy. the current real gdp is $10 trillion. what is the current amount of real consumption in the economy? $ trillion. (round your answer to two decimal places)

given that the mps in an economy is equal to 0.20, the multiplier is equal to 5.00. (round your answer to two decimal places) now assume that autonomous real consumption spending is $1 trillion. there is no other autonomous spending presently taking place in the economy. the current real gdp is $10 trillion. what is the current amount of real consumption in the economy? $ trillion. (round your answer to two decimal places)

Answer

Explanation:

Step1: Recall the consumption - GDP relationship

The consumption function in a simple Keynesian model is $C = a+ bY$, where $a$ is autonomous consumption and $b$ is the marginal propensity to consume (MPC). Given MPS = 0.20, we know that $MPC=1 - MPS$. So, $MPC = 1- 0.20=0.80$.

Step2: Recall the multiplier formula

The multiplier $k=\frac{1}{MPS}=\frac{1}{1 - MPC}$. Here, $k = 5.00$. The relationship between GDP ($Y$), autonomous consumption ($a$) and induced consumption ($bY$) is $Y=\frac{a}{1 - MPC}$. We know $a = 1$ trillion and $MPC=0.80$.

Step3: Calculate real - consumption

The formula for real - consumption $C=a + bY$. First, we find $Y$ using the multiplier. Since $k=\frac{1}{1 - MPC}=5$ and $a = 1$ trillion, and $Y=\frac{a}{1 - MPC}$, when $a = 1$ trillion and $MPC = 0.80$, $Y=\frac{1}{1 - 0.80}=5$ trillion. Then, $C=a + bY$. Substituting $a = 1$ trillion, $b = 0.80$ and $Y = 10$ trillion into the consumption formula $C=a + bY$, we get $C=1+0.8\times10$. $C=1 + 8=9.00$ trillion.

Answer:

9.00