Qf = $425 billion

What we want to know:

• new GDP if initially the economy is at $450
• or the GDP

What we know:

• change in I = -$5 billion (decrease)
• MPC = 0.8

 

 

 

 

Formulas from chapter 9:

• GDP = initial spending x multiplier

   

• 	1
  multiplier =	-------
  	MPS

• MPC +MPS = 1

 

 

 

 

So:

• MPS = 1 - 0.8 = 0.2

 

• multiplier = 1/MPS = 1 / 0.2 = 5

 

• GDP = initial spending x multiplier = - $5 billion x 5 = - $25 billion

 

• if the initial GDP was $450 and it decreased by $25 billion the new equilibrium GDP (Qf) = $425