Question

An economy that is currently in equilibrium and at full employment has an increase in Disposable income of $50 billion. If the marginal propensity to consume is 80%, what will be the increase in real GDP

Answer 1

$250 billion.

Step-by-step explanation:

The computation in the increase in real GDP is shown below:

Given that

MPC = 80% or 0.80

Income multiplier = 1 ÷ (1 - MPC )

= 1 ÷ (1 -0.80 )

= 1 ÷ 0.20

= 5

Now

The Increase in disposable income is $50 billion

So,

The Increase in real GDP is

= 50 × 5

= $250 billion

We simply applied the above formula so that the correct value could come

And, the same is to be considered