How to Calculate the Expected Increase in GDP from Stimulus Checks
Question:
If the government provides $100 billion in stimulus checks to people with a Marginal Propensity to Consume of 0.8, what would be the total expected increase in GDP?
Answer:
The expected increase in GDP from the $100 billion stimulus checks, assuming no taxes or international trade, is $500 billion.
In order to calculate the expected increase in GDP from the stimulus checks, we can utilize the formula:
Expected increase in GDP = Stimulus checks amount / (1 - MPC)
Substitute the given values into the formula:
Stimulus checks amount = $100 billion
Marginal Propensity to Consume (MPC) = 0.8
Now, plug these values into the formula:
Expected increase in GDP = $100 billion / (1 - 0.8)
Simplify the equation:
Expected increase in GDP = $100 billion / 0.2
Calculate the result:
Expected increase in GDP = $500 billion
Therefore, the expected increase in GDP as a result of the $100 billion stimulus checks, assuming no taxes or international trade, is $500 billion.