Chapter 10, Problem 9P

Subpart (a):

To determine

Multiplier, MPC and change in GDP.

Explanation of Solution

Multiplier can be calculated as follows:

$\begin{array}{c}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPS}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.4}}\\ =\text{2}\text{.5}\end{array}$

Multiplier is 2.5. If the MPS is 0.4, the multiplier will be 2.5.

If the MPS is 0.6 then the multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPS}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.6}}\\ =\text{1}\text{.6667}\end{array}$

If MPS is 0.6, the multiplier will be 1.667. If the MPS is 1 then the multiplier will be infinity or undefined.

Economics Concept Introduction

Concept Introduction:

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.

Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.

Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.

GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.

Subpart (b):

To determine

Multiplier, MPC and change in GDP.

Explanation of Solution

If MPC is 1, then the multiplier will be infinity or undefined. If MPC is 0.90, then the multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{1-\text{0}\text{.90}}\\ =\text{10}\end{array}$

Hence, when MPC is 0.90, then the multiplier will be 10.

If MPC is 0.67, then multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.67}}\\ =\text{3}\text{.0303 }\end{array}$

Hence, when MPC is 0.67, then the multiplier will be 3.

If the MPC is 0.50, then the multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.50}}\\ =\text{2 }\end{array}$

Hence, when MPC is 0.50 the multiplier will be 2.

If MPC is 0, then the multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{\text{1}-\text{0}}\\ =\text{1 }\end{array}$

Hence when MPC is 1, then the multiplier will be 1.

Economics Concept Introduction

Concept Introduction:

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.

Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.

Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.

GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.

Subpart (c):

To determine

Multiplier, MPC and change in GDP.

Explanation of Solution

Multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.8}}\\ =\text{5}\end{array}$

Change in the level of GDP can be calculated as follows:

$\begin{array}{l}\text{Change in GDP}=\text{Multiplier}\times \text{Investment}\\ =\text{5}\times \text{8 billion}\\ =\text{40 billion}\end{array}$

Hence, the change in GDP is by $40 billion.

Economics Concept Introduction

Concept Introduction:

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.

Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.

Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.

GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.

Subpart (d):

To determine

Multiplier, MPC and change in GDP.

Explanation of Solution

In case, if 0.67 is MPC, the change in GDP will be equal to $24 billion. In this case, the multiplier will be 3.

Multiplier can be calculated as follows:

$\begin{array}{l}\text{Multiplier}=\frac{\text{1}}{\text{1}-\text{MPC}}\\ =\frac{\text{1}}{\text{1}-\text{0}\text{.67}}\\ =\text{3}\text{.03}\end{array}$

Change in the level of GDP can be calculated as follows:

$\begin{array}{l}\text{Change in GDP}=\text{Multiplier}\times \text{Investment}\\ =\text{3}\text{.03}\times \text{8 billion}\\ =\text{24}\text{.24 billion}\end{array}$

Hence, the change in GDP is by $24.24 billion.

Economics Concept Introduction

Concept Introduction:

Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.

Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.

Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to the changes occurred in the income level.

GDP (Gross Domestic Production): GDP refers to the market value of all final goods and services produced in an economy during an accounting year, at particular price.