Chapter 26, Problem 5P

To determine

To determine: The change in real GDP in the given scenarios.

Concept Introduction;

Gross Domestic Product (GDP): It is defined as the value of output which is produced inside the border of a country in the given interval of time.

The formula to calculate change in GDP is:

Here,

• is autonomous spending
• MPC is marginal propensity to consume.

Autonomous Spending: It comprises of given consumption levels, investments made and the purchases made by the government.

Marginal Propensity to Consume (MPC): It is defined as the change which occurs in total consumption level due to change in income.

The formula to calculate MPC is:

Here,

• is change in income.
• is change in consumption level.

Multiplier: It is defined as the ratio of total change in gross domestic product due to change in the autonomous spending.

The formula to calculate multiplier is:

Here,

MPC is marginal propensity to consume.