1. What is the eventual effect on real GDP if the government increases its purch

Question

1. What is the eventual effect on real GDP if the government increases its purchases of goods and services by $50,000? Assume the marginal propensity to consume (MPC) is 0.75 You canc You can v up on an You can you get i You lose n your o 2. What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $50,000? Assume the MPC has not changed. Number O eTexth 3. An increase in government transfers or taxes as opposed to an increase in and services will result in: O Web t on rea O Tech O no change to real GDP O an identical enventual effect on real GDP O a larger eventual effect on real GDP Previous Give Up & View Solution D Check Answer (D Next Ext Hint

Explanation / Answer

1) Increase in GDP = Increase in G/(1 - MPC) = 50000/0.25 = $200000

2) Increase in GDP = Increase in TR x MPC/(1 - MPC) = 50000 x 0.75/0.25 = $150000

3) Option 1 is correct - a smaller eventual effect on real GDP (income/output multiplier is smaller in case of government transfer payments)

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