Suppose that an initial $20 billion increase in investment spending expands GDP

Question

Suppose that an initial $20 billion increase in investment spending expands GDP by $20 billion in the first round of the multiplier process. If GDP and consumption both rise by $10billion in the second round of the process, what is the MPC in this economy?

Instructions: Round your answer to one decimal place

MPC = $

What is the size of the multiplier?

Instructions: Round your answer to one decimal place

The multiplier = $

If, instead, GDP and consumption both rose by $12 billion in the second round, what would have been the size of the multiplier?

Instructions: Round your answer to one decimal place

The multiplier = $

Explanation / Answer

Suppose that an initial $20 billion increase in investment spending expands GDP by $20 billion in the first round of the multiplier process. If GDP and consumption both rise by $18 billion in the second round of the process, what is the MPC in this economy?

i also need to know how to find the multiplier.

ANS=======================================

MPC=18/20=0.9.

the following is the pattern you should see in change in GDP:
change in Y in period 1 = change in I*MPC^0
change in Y in period 2 = change in I*MPC^1
change in Y in period 3 = change in I*MPC^2
etc.

change in Y in period 1 = $20bn
change in Y in period 2 = $18bn
change in I = $20bn

substitute the above in the notations in the first paragraph.

$20bn = $20bn^MPC^0 = $20bn
$18bn = $20bn^MPC^1 = $20bn*MPC

take the second line...
$18bn = $20bn*MPC
MPC = 0.9

multiplier = 1/(1-MPC)
= 1/(1-0.9) = 1/0.1 = 10

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