Question

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by

Answer 1

Answer:

Aggregate expenditure must have increased by $50 billion

Explanation:

We have given level of GDP is increased by $100 billion

Marginal prosperity MPS = 0.5

So multiplier $m=\frac{1}{1-MPS}=\frac{1}{1-0.5}=2$

We have to find the aggregate expenditure change

Aggregate expenditure change is given by $=\frac{level\ of\ increase\ in\ GDP}{multiplier}=\frac{100}{2}= 50billion$  

So aggregate expenditure must have increased by $50 billion