Question

Take a look at Figure $12-5$. If current real $GDP$ for this nation's economy is $\$13$ trillion per year, what are the values of planned real investment and actual real investment? What is the amount of the unplanned inventory change, and why does this fact imply that real $GDP$ must change? To what new level will real $GDP$ adjust?

Short answer

The new real level value of$MPC=0.04.$

Step-by-step solution

Step: 1 Overall cost:

The overall cost for all services / goods in the economy is known as aggregate demand. Consumption spending $\left(C\right)$, investment $\left(I\right)$, and government expenditure $\left(G\right)$make up the closed economy. However, in an open economy, it comprises not only these but also exporting $\left(E\right)$and imports role="math" localid="1651649600587" $\left(M\right)$.

It can be stated mathematically as $Y=C+I+G+X-M$.

Step: 2 Graph:

When the current price is $100$, real GDP is $\$13$trillion; however, when the market price is raised to $110$, real GDP decreases to $\$9$trillion. The demand curve, which displays the inverse relationship between level of prices and real GDP, will trend upward.

Step: 3 Finding value:

Marginal Propensity to Consume is the amount of change in consumption due to change in income level. It can also be written as$MPC$.

Therefore, $MPC$ can be computed as shown below:

role="math" localid="1651650000222" $\begin{array}{l}MPC=\frac{\mathrm{\partial }C}{\mathrm{\partial }Y}\end{array}$

role="math" localid="1651650061677" $MPC=\frac{0.18}{4}$

$MPC=0.04.$

The value of$MPC$is$0.04.$