A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assuming the absence of taxes, international trade, and changes in aggregate price level, answer the following questions.
• Suppose that the multiplier is 4. What was the size of the change in government purchases of goods and services that resulted in the increase in real GDP of $200 million?
• Now suppose that the change in government purchases of goods and services was $20 million. What value of the multiplier would result in an increase in real GDP of $200 million?
• Given the value of the multiplier you calculated in part (2), what marginal propensity to consume have led to that value of multiplier?
1. The size of the change in government purchases of goods and services that resulted in the increase in real GDP of $200 million was $50 million.
2. The value of the multiplier that would result in an increase in real GDP of $200 million is 10.
3. The marginal propensity to consume that would lead to a multiplier of 10 is 0.8.