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Unformatted text preview: you arrived at your answer. MPC = Consumption / Income 20,000,000/50,000,000=.4 The businessmen "consumed" 20 million dollars in investments and received 50 million dollars in return as their "income" 3. Assume taxes increase by $200 and government spending increases by $200. The marginal propensity to consume is 0.75. Explain how GDP is impacted as a result. (Your answer must include the amount of change in GDP, and you must show how you arrived at your answer.) Tax multiplier=MPC/MPS=.75/.25=3 Expenditure multiplier= 1/1-.75=4 3 x $200 4 x $200-800+600=$200 decrease in GDP 4. Calculate the marginal propensity to consume when a decrease in investment of $10 billion causes RGDP to decrease by $50 billion. MPC= delta $10 billion/ delta $50 billion=.2...
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- Fall '08