Question

Calculate the values for each of the questions. Assume that in each country there are no taxes, international trade, or inflation and that interest rates are fixed. The Italian government decides to stimulate the economy by sending checks worth $70 billion to Italian consumers. If the government spending multiplier is 1.5 , calculate the MPC to determine the final change in Italy's real GDP due to the transfer. Please give your answer as a whole number in billions of dollars.

Answer 1

• MPC = 0.33
• Change in GDP = $35 billion

Step-by-step explanation:

The new real GDP after the spending is;

= Cash injected * Multiplier

= 70 * 1.5

= $105 billion

Change in Italy real GDP

= 105 - 70

= $35 billion

The Marginal Propensity to Consume (MPC) can be calculated by;

Multiplier = 1 / ( 1 - MPC)

1.5 = 1 / ( 1 - MPC)

1 - MPC = 1/1.5

MPC = 1 - 1 / 1.5

MPC = 0.33