What we want to know:
- new GDP if initially the economy is at $400
- or the GDP
What we know:
- change in I = +$5 billion
- 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 $400 and it increased by $25 billion the new equilibrium GDP (Gf) = $425