How to Calculate Decrease in Equilibrium GDP
What is Equilibrium GDP and how does it change?
Equilibrium GDP is the monetary value of final goods and services purchased in a nation over a specific time period. How does it change when government spending decreases?
Answer:
Equilibrium GDP will decrease by $250 million if the government spending decreases by $50 million and the MPC is 0.8.
Decrease in equilibrium GDP can be calculated using the formula: Decrease in GDP = Change in Spending / (1 - MPC).
The marginal propensity to consume (MPC) is the proportion of a consumer's overall pay increase that they spend on spending rather than saving. In this case, the MPC is 0.8.
Therefore, using the given values: Decrease in GDP = $50 million / (1 - 0.8) = $250 million.
This shows that a decrease in government spending by $50 million will lead to a decrease in equilibrium GDP by $250 million.