Question

The formula $X= \frac{D}{1-h}$ is used in economics to determine the impact on Gross Domestic Product (GDP) X by increasing government spending by D dollars if the proportion of additional income that people spend is h.

(a) Solve the formula for h.
(b) Find h if the government increased spending by $400 billion and GDP increased by $4000 billion.

Answer 1

x = D/(1 - h)
1 - h = D/x
h = 1 - D/x

D = 400, X = 4000
h = 1 - 400/4000
h = 1 - 0.1 = 0.9