the marginal propensity to consume is equal to 0.60. an increase in household wealth causes autonomous…

the marginal propensity to consume is equal to 0.60. an increase in household wealth causes autonomous consumption to rise by $40 billion. calculate by how much equilibrium real gdp will increase at the current price level, other things being equal. equilibrium real gdp will increase by $□ billion. (enter your response as a whole number.)

the marginal propensity to consume is equal to 0.60. an increase in household wealth causes autonomous consumption to rise by $40 billion. calculate by how much equilibrium real gdp will increase at the current price level, other things being equal. equilibrium real gdp will increase by $□ billion. (enter your response as a whole number.)

Answer

Explanation:

Step1: Recall the multiplier formula

The multiplier $k=\frac{1}{1 - MPC}$, where $MPC$ is the marginal - propensity to consume. Given $MPC = 0.60$, then $k=\frac{1}{1 - 0.60}=\frac{1}{0.40}=2.5$.

Step2: Calculate the change in equilibrium real GDP

The change in autonomous consumption $\Delta C = 40$ billion. The change in equilibrium real GDP $\Delta Y=k\times\Delta C$. Substitute $k = 2.5$ and $\Delta C = 40$ billion into the formula, we get $\Delta Y=2.5\times40 = 100$ billion.

Answer:

100